Pay attention to changing markets

The stock market can’t seem to decide what role it wants to play this holiday season. One day it’s Santa, delighting our hearts with triple-digit gains and filling us with hope that the bleakness of autumn has passed and a bright, shiny New Year lies ahead. Another day it’s the Grinch, stealing away our wealth before our eyes.

As we entered the week before Christmas, the Dow, which had been flirting with the 11,000 mark again, was back in the 10,400 range while NASDAQ, which appeared ready to rally past 3,000, had slipped back to 2,653.

To that point, year-to-date, the TSE 300 was still in the black, up 7.2 per cent. But that’s a long way from the giddy heights we enjoyed as recently as September, when we were the top-performing market in the world. The Dow Jones Industrial Average was off 9.2 per cent for the year, while the S&P 500 had fallen 10.7 per cent. As for the NASDAQ Composite, it had lost a breath taking 34.8 per cent to that point in 2000.

History repeats
Last January, as the millennium New Year’s revels were winding down, I wrote in the Internet Wealth Builder:
"The high-tech party could continue to roar on for nths. But the reality is that many of these stocks are extremely expensive and vulnerable to profit-taking at the slightest hint of bad, or even indifferent, news. . ."

"I believe we will see a correction in the high-tech sector in 2000, perhaps a sharp one. There is no way of knowing when that might happen, although my hunch is sooner rather than later in the year. Such a correction won’t necessarily pull down the broader market because stocks in other sectors aren’t as overvalued. But, given the profile of the technology stocks these days, if they do fall the rest of the market is likely to at least stumble."

There are times when one takes no pleasure in being proved correct, and this is one of them. I, and millions of other investors, would have been much happier if the tech stocks had gone through a more gradual consolidation phase. But the sad truth is that what we witnessed in 2000 was simply history repeating itself yet again.

Whenever anything becomes highly overvalued, there will inevitably be a day of reckoning. It doesn’t matter if it’s Vancouver housing, or Japanese stocks, or gold, or, going back in time, tulip bulbs. Sooner or later the feeding frenzy ends and the last ones to get on board are the ones who take the biggest hit.

That’s exactly what happened in the case of high tech in general and NASDAQ in particular. If you came to the party early, you are likely still ahead of the game, even with the horrendous showing in 2000. Over the past three years (to December 15), NASDAQ is up 70.8 per cent (almost twice as much as the TSE 300), while the five-year advance is 157.5 per cent. But if you only decided to get into the action last January or February, when NASDAQ was hitting record highs, you’re licking your wounds now.

Turbulent times ahead
Once again, it demonstrates the importance of always taking some profits when markets are running strong. By converting some of the paper gains into cash along the way, you ensure you won’t give back everything when the ship goes down and you reduce your overall portfolio risk.

I expect the split personality market to continue into the New Year.  We may even see a modest rally at the beginning of January, following all the tax loss selling.

But don’t be fooled if that happens. It isn’t a signal that the worst is over. There are more turbulent times ahead for this Santa/Grinch market. Look to your investment portfolio and make sure it can handle the stress.

The Internet Wealth Builder is a weekly e-mail newsletter edited and published by Gordon Pape. For information on becoming a member, visit his Web site at