PETER BRIMELOWSurprise: Bears still growling about 1987...

PETER BRIMELOW
Surprise: Bears still growling about 1987
Commentary: They see similarities in 2006 to the '87 crash
By Peter Brimelow, MarketWatch
Last Update: 12:01 AM ET Aug 21, 2006


NEW YORK (MarketWatch) -- Market up five days running. Biggest Nasdaq gain in four years. Time for something distinctly depressing!
Well, not deeply depressing ... totally. But checking around, I was surprised to find that Don Hays of Hays Advisory, the respected institutionally-oriented superbull, was having one of his periodic moments of nuanced doubt after the past week's strong action.
He wrote in his last bulletin: "We are amazed at the lack of belief in this rally by the public investor. We find the 'dumb' investor is still nervous and cautious, and the 'smart' investor is not yet bailing out. So yes, you have to start paring back on those disappointing stocks that have not used the recent up-move in the market to heal themselves ..."
But, Hays qualified with his usual exquisiteness, "Don't overdo it. The tug-of-war ... is still on the side of the bulls."
And, more alarmingly, John Mauldin of Millennium Wave Advisors was reflecting in his week-ending e-letter about taking the hard-landing side in against Oak Associates' Ed Yardeni in a point-counterpoint debate interview that appeared in Aug. 18 Wall Street Journal Online. See Wall Street Journal column.
Mauldin's bearish take: "We have a slowing economy and rising inflation - by any other name that's stagflation. And given all the excesses of the 1990s and the excesses of the housing market, a little stagflation - maybe including a mild recession - may be about the best outcome we could ask for."
Mauldin's more-alarming afterthought: a chart argument made by Bill King in his daily King Report that the S&P 500 action after June has produced what King calls a "W pattern" with three forays up to 1,280-1,300 separated by two down to 1,220.
Ominously, King notes, that's just what happened before the 1987 Crash.
King wrote: "We are NOT suggesting that a 1987-like crash is imminent; but we are warning that 'W' formations can lead to dramatic market reversals. The current stock market is in a weaker technical position that it was in 1987 as evinced by its position to its quarterly and yearly moving averages. In 1987 interest rates were much higher, but the economy was stronger and the US trade deficit problem was in its embryonic stage."
King's conclusion: "The moral of the story is stocks need to rally sharply from here to negate the 'W' pattern, or on any decline stocks must NOT breach the base of the 'W' pattern." (i.e. 1,220). If a stock decline violates the base of the 'W' pattern, Big Mo, as in 'Momentum Players' will be unleashed by traders and investors and he will be hurling red tickets."
I can't help it; I always twitch when anyone talks about the 1987 Crash.
You had to be there.
And, as it happens, from a very different perspective, New York University economist Nouriel Roubini last week also published a discussion on his Roubini Global Economic service on "The Scary Similarities between 2006 and 1987."
Among other factors, Roubini cites "trade protectionism and asset protectionism; hedgy and trigger-happy investors and rising geopolitical risks; the risk of a disorderly fall in the U.S. dollar; a slush of financial derivatives that are a black box that no-one understands... frothy markets where years of too easy money have created bubbles galore - the latest in housing - that are ready to burst; a bubble of thousands of new hedge funds with inexperienced managers...a housing market whose rout may trigger systemic effects ..."
Many readers don't like me quoting bears. But, hey, you aren't going to hear about them from your broker.