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[TTHQ Staff]

BEING STREET SMART by Sy Harding A FRUSTRATING MARKET! April 23, 2004. Most of the time the stock market moves in definite trends, up or down, for months at a time, and trend reversals, when they come, are quite clear. But so far this year, in spite of occasional big one or two-day moves up or down in response to a news event, or a surprise economic number, there has been no sustained follow through in either direction. This week was typical. A triple-digit loss for the Dow on Tuesday in reaction to Alan Greenspan’s hints to Congress that the Fed may begin raising interest rates sooner than previously expected. Only to be followed by a triple-digit gain on Thursday, supposedly in response to strong 1st quarter earnings reports. So the Dow and S&P 500 closed up just fractionally for the week, while the always more volatile Nasdaq gained almost 3%. At their peaks three months ago, the Dow closed at 10702, the S&P 500 closed at 1155, and the Nasdaq closed at 2153. Three months later the Dow is at 10472, the S&P 500 at 1140, and the Nasdaq at 2049. They have declined, but just two to five percent from where they were three months ago, a mostly trendless market. It’s the type of market where neither bulls nor bears can make money on a buy and hold basis. And it’s just as difficult for investors using technical analysis, since in a flat market the moves up off support or down from resistance, don’t go far before reversing. It’s just as difficult for those using fundamental analysis, since the bull market is at a stage where strong economic numbers, and strong earnings, are now often met by the stock’s tumble, on the theory that the stock price has gotten ahead of the earnings. As flat markets usually do, this one has engendered a lot of jumping uncertainly from the bullish side to the bearish side and back again, and into different types of investing, in an effort to force a profit out of a flat market. It’s a dangerous type of market because it tempts investors to give up on their normal methods of investing, which no longer seem to be working, and leap into the unknown. A few weeks ago I noted that Warren Buffett, the world’s most successful investor, has apparently been selling stocks, and is now sitting on a huge $36 billion in cash. His comment was that he dislikes cash, but dislikes being foolish even more, and right now he can see no investment area in which he can have reasonable confidence. So far, he seems to have been right. Neither bulls nor bears have been able to make money consistently in the flat stock market, but there have been no viable alternatives. The typical safe havens in times of stock market uncertainty have usually been bonds and gold. But even U.S. treasury bonds have plunged almost 10% in value over the last month, as fears have risen that the Federal Reserve will soon begin to raise interest rates to slow economic growth to a more sustainable pace. The hope that gold would be a safe haven, as it has been for much of the last three years, has been even more disappointing, with the average gold stock and mutual fund down 19% so far this year. In the scramble to find someplace where profits can still be made, many belatedly moved into Real Estate Investment Trusts (REITs). It made sense. They’ve been hot since the new bull market began, pay high dividends, and have been reporting strong earnings. But no safe haven there either. For example, the iShares D J US Real Estate fund, a diversified portfolio of real estate stocks, plunged 14% over just the last three weeks, also apparently on the increased concerns that the Fed will soon begin to raise interest rates. While no one wants to be in cash, so far chasing last year’s winners of stocks, bonds, gold, REITs, etc., has not worked near as well as Buffett’s cash. Maybe the guy knows what he’s doing? Meanwhile, first quarter earnings reports have been coming in better than Wall Street’s estimates. Thompson-First Call reported today that with more than half of S&P 500 companies having already reported, a huge 78% have reported better than expected earnings. In normal times, such a positive earnings reporting period would have been enough to send the market into the stratosphere. But it hasn’t. With the earnings reporting period having only another week or so to run, it’s difficult to see what the catalyst will be for further market upside after it ends. So Warren Buffett’s current caution still has our attention.