This market is nuts, and the sooner the day traders go broke, the better.

Prior to the day trader phenomenon, stocks fluctuated on a fairly predictable basis. Investors evaluated a company's business, products, markets, financials, etc., and a stock might move up or down a point or two at the maximum, on fairly big news. I realize that the averages were a lot lower in the past, but that should not be relevant to an individual stock's performance today. Averages will be more volatile over time because of the multiplier effect of stock-splits. But a stock's price fluctuation is not related to it's previous stock-splits.

Today, two glaring examples of day trader activity were Qualcomm +32 ½ @ 378, and Sun Microsystems + 4 9/16 @ 119 5/16. Sure, these are great companies with great futures, but this kind of action is very unhealthy. That's because buyers are buying to sell to a new "investor" in maybe 5 minutes, and maybe the new "investor" will sell to another in 3 minutes. Ah, long-term investing, where is thy sting?

This approach smacks of pure gambling, and has all the associated risks. Stocks that go up by these amounts have every capability to go down the same way. Now the market has been on an unprecedented hot streak, and you can't tell these newcomers of the inherent dangers. They have been making money, and such success brings contempt for contrary perspectives.

Take it from a long-time investor/trader, the market is treacherous and shows no mercy. This market will not go up forever, and markets never do. Sure, no one can tell you the timing of the next big sell-off, because of course, it's unknowable. It could be in a day, a month, or 3 years, etc. But when it does come, it will come like a bolt out of the blue, and massacre the unwary day traders.

Long-term investors will be okay, as they generally are not caught up in market euphoria, and have a constructive perspective. But the day-traders, or "minute traders" will get killed. As many have not witnessed a real Bear market, they will not be able to believe that the party is over, and will be expecting the market to snap back, as it has for years now, after modest sell-offs. And they will trade accordingly. Further, high margin use is prevalent among this group, and will severely exacerbate the impact of the decline.

I would encourage our readers to avoid momentum fever, and to invest for the long-term. There is no substitute for knowing your companies well, and to be extremely sensitive to changing company circumstances, for better or worse. Tax-loss selling season is at hand, and it should bring great opportunities to snap-up bargains. Don't criticize yourself if you have accumulated too much cash, because that should give you the opportunity to make some key buys.

The Market Pro - November 12, 1999