Lessons from the Past: No Hurry to Climb Aboard This Market

My Nasdaq 4-week market timing tool has been in DON'T BUY territory since September 4. I continue to avoid adding new long positions. All 10 of the model portfolios in my five newsletters are completely in cash, and my screens have stopped yielding buy candidates.

The Nasdaq tumbled 15.3% last week, backing up a 10.8% drop the previous week, the first time the index had put together back-to-back double-digit weekly declines in its 38-year history. It was the Nasdaq's fourth-worst week ever:

• Week ended 4-14-00, -25.3%.
• Week ended 10-23-87, -19.1%.
• Week ended 9-21-01, -16.1%.

The Nasdaq put in its third-worst two-week decline ever, trailing only the 1987 and 2000 crashes, and also trailed those two plunges on a three-week basis. It closed at 1,649.51, its worst mark since May 2003.

The lessons learned in those previous declines are mixed. In all three cases, the index eventually went lower before finding bottom. The selloffs did generally spark solid intermediate-term rallies.

In 1987, the Nasdaq fell another 12.2% the following week before finding bottom, revisited those lows 5-6 weeks later and then gradually saw improving conditions going forward.

In 2000, the Nasdaq made a short-term bottom the following week, bounced sharply for two weeks, then undercut the low by 5.7%, then rallied off and on for about 3 1/2 months before plunging into a two-year freefall that eventually took the Nasdaq more than 78% off its high.

The 2001 lows following the 9/11 attacks bottomed that week and set up a 51% rally in less than four months before heading south and finally hitting bottom in October 2002.

The history of the Dow Jones industrial average, which had its second-worst week ever last week, offers additional clues. In each instance where there was a three-week loss of more than 20% - 1899, 1914, 1929, 1931, 1932, 1940, 1987 and 2001 - the index either undercut or revisited the lows of the crash period. Again, there were some great rallies off those selloffs.

The lesson I derive is that crashes create buying opportunities, but there is no hurry to climb aboard and it's probably a bad idea to chase rallies.

The Nasdaq would switch back into BUY mode with a break above the September 19 high of 2,318.11. Those numbers will continue to trend lower until we get a strong rally.

I won't get truly aggressive on the long side until another BUY signal kicks in.

Disclosure: none