Don't Expect a Big Bounce Any Time Soon

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Investors can only scratch their heads and wonder

Well, it doesn't get much worse than this.

Monday, the NASDAQ dropped more than 6 percent and found a low — 1923 — not seen since December 1998; the mind-blowing 15-month rally that pushed the tech-heavy index to beyond 5000 on March 10 of last year is now utterly erased. The Dow dropped, er, only 4.1 percent (a measly 436 points) as each and every one of the index's 30 stocks lost ground. And the S&P 500 finally slipped into official "bear market" territory, now 23 percent off its highs and tasting those same December 1998 depths as the NASDAQ.

So, does it get any worse than this?

Tuesday started off with some bargain hunting, but it isn't likely to be the big bounce. Before the bell, the Commerce Department reported that February retail sales — need I remind anyone that consumer spending is two thirds of the U.S. economy and its safety net in hard times? — dropped 0.2 percent, dramatically lower than Wall Street forecasts for a 0.3 percent gain. And without auto sales — think lower interest rates and car loans — it was even worse.

And of course Japan's economy is still in the tank (a Monday drop in the Nikkei to 20-year lows — yes, that's right, 20-year lows — started Wall Street off in a bad mood), and a global slowdown is still the hot new topic on pessimists' lips. Corporate earnings are still bad and getting worse, though it's hard to imagine how anybody could still be shocked and disappointed when they're told a company's profits are suffering in the current economic correction. And while unemployment is still well-contained, layoffs are still part and parcel of each new earnings report, hitting everybody from Chrysler to Cisco. And we've still got a week before Alan Greenspan does his thing.

But never mind how many times you've heard this before (the "bottom" talk's been circulating for at least 1000 points on the NASDAQ by now), the end of the carnage does look to be near. A day as bad as Monday can be good news in itself — they call it "capitulation," when the trading floor is wet with tears — and some analysts hold that it's a must before any turnaround rally can really take hold.

On the other hand, Monday wasn't exactly a true bloodbath — the volume of selling wasn't inordinately high, it's just that nobody was much interested in buying. That's how you get those long, slow slides from 9:30 a.m. till 4 p.m., and until the buyers start showing up, this market isn't going anywhere.

It isn't just techs that smell rotten — brokerage stocks took a beating Monday too, because who wants a broker these days? — but, OK, it's mostly techs. And therein lies the pessimism problem.

The NASDAQ has of late been the economy's best leading indicator — the crash of spring 2000 begets the economic slowdown of fall 2000, for example — and the tech "wealth effect" has also become the main engine by which Alan Greenspan gets rate-cut money into people's pockets before the cuts actually have their full effect on the economy.

The logic of the August recovery is still alive. Corporate earnings bottom out — bad macroeconomic news, after all, can be surprising only for so long before it's all discounted in. Greenspan slashes rates — and yes, we may be back to a 50-point cut (don't tell the markets because then it won't work) — and the markets shudder to life. People and businesses start feeling a little better, and spend some money. By summer's end, 12-month earnings outlooks are on the rise, and by fall some folks are even turning a profit. After all, like a repenting teenage shoplifter, a tearful NASDAQ has given back everything it took since the bubble was born. With Greenspan cutting rates, how much lower could it possibly go?

Well, here's the scary thought — that a 12-month NASDAQ bear market (in which it's lost 63 percent of its value) will be good for at least a 12-month slowdown, maybe more. The rest of the world has the same cold the U.S. does, and there's not much reason at all for people to start buying computers and cell phones all over again, seeing as how they all do pretty much the same thing they did last year. Under this scenario, we're still near the bottom — definitely nearer, at least, than we are the top.

It's just that we could be here for a while.