Today was very unsettling. Some Internet stocks have been making incredible gains, as speculators went into a feeding frenzy bidding up a number of these stocks to ridiculous levels. The worst case was one that traded for 3 on Friday, 7 on Monday, 21 on Tuesday, and at one point today it was trading over 28! Now isn't that a fair rate of return? Isn't this the way the stock market is supposed to work?

NO. This is the worst kind of excess, and is the first significant red flag raised over this long running Bull market. Prior Bear caveats have pretty much centered around historical standards. Sure, they have pointed out slower earnings growth, the Asian factor that has yet to show its full effect, potential higher labor costs, and a possible interest rate hike in the near future. But the Bears' main points have revolved around measurements that have held up over many years of market experience.

These measurements include price earnings ratio, dividend rate, book value, etcetera. I have noted before that I can live with a market that trades out of these historical bounds, as long as our environment is one of low interest rates, low inflation, high productivity, and massive in-flows of money. Yes, you shouldn't stand in front of a moving train, the trend is your friend, and all that.

But today was different, to the extent of the degree of speculation. Pundits have noted that the thing that might undo this market is some unexpected event out of the blue. I think people would expect that to mean some external factor like war, the death of a high official, an oil squeeze, etc. Maybe the significance of recent days, especially today, is that the unexpected event is an internal factor - a "casino" mentality that may lead to selected stock crashes causing investors to have second thoughts about other stocks that are trading at lofty levels, regardless that they are "solid" issues. This could lead to erosion of stock prices in general, with negative connotations for the entire market.

I'm still a Bull, and that means I think there's still a lot of money to be made. I am saying, however, that we may have seen the beginning of something that could be signaling we are close to a market top. A good approach here is to reduce or eliminate margin and start taking some profits as we go along. Hold that cash aside and let it build up for a change. And let's all keep watching for any continuation of Market Madness. Stay tuned.

The Market Pro - April 22, 1998