So begins the famous poem about six blind men encountering an elephant for the first time. Each man, seizing upon a single feature of the animal he first touches, (and not seeing the elephant as a whole), loudly maintains a limited perspective on the nature of the beast. Variously described as a wall, a spear, a snake, a tree, a fan or a rope -- depending on whether the blind men had first grasped the creature's side, tusk, trunk, knee, ear or tail. (The entire poem can be found at: wordfocus.com)

Why I woke up with this parable in my head is anyone's guess. (If I am stepping on anyone else's recently used thesis, my apologies in advance). I am surely not the first person to draw on this to describe the market's mayhem, and I won't be the last; But lately, with so many cross currents and differences of opinion, it is especially apt.

Let's look at what the six "blind men" are seeing these days in the markets:

1) World wide weakness:
Europe has slipped into the same malaise that first captured the US nine months ago. That's not surprising, given that the US is such a large destination for European exports. As we slow down consumption, they slow down revenues and profits. Germany, in particular, is vulnerable to a broader slowdown; We are seeing that reflected in the technical breakdown of the Dax.

But its not just Europe: Worldwide economic softness, including Japan, Argentina and Brazil, simply reduce demand for goods and services.

What makes this particularly difficult to read is the cross-current of the US Dollar, which just fell to a Five-Month Low versus the Euro. This is also the weakest level in two months of the dollar versus the yen.

That underscores expectations that the world's biggest economy isn't recovering yet. And it makes it less likely that either Europe or Japan will be able to export their way out of their economic weakness.

But it presents a mixed picture for the US Markets: A strong dollar makes US goods -- including equities -- more expensive. As the dollar weakens, US internationals -- think Cat, Phillip Morris, Boeing, and a host of tech firms -- may have an easier time selling goods abroad.

Just as the economic softness in the US accelerated the world wide weakness, its safe to expect that a recovering US economy will help lead the world out of its economic doldrums.

2) The Fed:
Historically, whenever the fed cuts 3 times in rapid succession, the market is 20% higher 6 to 12 months later.

By the way, listen for this statistic to get misquoted at every opportunity. In the press, and more recently by several commentators and guests on CNBC, this data point gets mangled.

Its not 6 months after the first cut, its 6 to 12 months after 3 rapid cuts -- which puts the market's recovery somewhere between September 2001 and March 2002.

The intermediate picture -- a 20% rally over the course of six months -- is much clearer than the immediate future.

3) The Technical Picture:
The markets, especially the Nasdaq, continue to drift lower on an absence of buyers. We have stopped making higher lows, and instead continue to breach key support lines.

Both the Nasdaq, and the S&P500 index are in definitive down channels, and have been since late May. Both indexes are market cap weighted -- and big caps are not where the growth is, and probably won't be for some time. The silver lining in this dark cloud only good news is the descent is much less severe than the period from September 2000 to April 2001.

But there's scant comfort in dying slowly. Most people would rather rip the band-aid off all at once, rather then tear it slowly. And slowly is what we are getting.

The Nasdaq continues to drift down, lazily piercing key technical levels. The gap up following the last surprise Fed Cut created some support at 1935-45, and we have now worked through that. Next is the 1900, then 1775, and potentially, the psychologically important April lows of 1619.

Some see the lighter Summer volume as a glass half full, but that has complications of its own -- and makes it more likely that whatever rally finally comes, will be fast and furious.

4) Oversold TRIN (Arms Index)
The Arms index is again flashing a buy signal. This mathematical quotient (advancers vs decliners divided by the quotient of the VOLUME of advancers vs decliners), measures the level of fear in the market.

The TRIN is showing high levels of despair -- but historically, it can lead a rally by as much as 25 days. So we are put on notice that while an oversold rally is due, the exact timing of it is much less certain. As a wiser man than I once said, "Sell Hope, Buy Despair."

I use the response I get to my published articles as my own gauge of fear. The last CBS Marketwatch article -- which was up on their front page for nearly a week -- produced much less angry email than a comparable piece six months ago. That tells me that people are following the market less closely than they were. While that's a good sign of fear and disgust with equities, (a normal part of a long bottoming process), it also suggests we may have a way to go.

5) The rest of the market:
There is a universe of equities which are not big cap technology. If you back out the market's former favorites, and select stocks out of this broader, non tech, mid cap universe, you've actually been doing OK.

In my most recent comments, I cited the stat that 2 out of 3 stocks are higher since the 1st Fed cut. You can bet these stocks are NOT the big cap, tech stocks which funds such as Janus have been dumping for months now.

We continue to look for value opportunities in the small and mid cap areas, and maintain tight stops on the occasional foray into the tech arena.

6) The Calendar:
Today (August 15) we are half way through the quarter. The danger is that we are only a few short weeks from (gasp!) preannouncement season. The past 3 quarters saw a rally into preannouncements -- which caused a vicious pullback each Q.

Market participants seem to have wised up to that game. We have pulled back in anticipation of the preannouncement season.

That makes it much more difficult to game how the market will react to the next round of hand ringing meas culpas. It also makes it possible that the usual Summer doldrums, with its attendant absence of buyers, may continue past Labor Day. Yet another variable cross current at work.

I don't know why this parable leapt to mind this morn (I read so much material each day its sometimes hard to recall if something is original or merely freshly remembered) So again, my apologies in advance if I'm stepping on anyone else's recently used thesis.

But this parable is a great example of how easy it is for us to close our minds fill in the blanks with sweeping generalizations and misinterpretations. We also see the carnage in the big cap tech names, as well as the strength in selected pockets of the rest of the market. We have short term weakness, but we know that the markets are cyclical in nature, and we can see the groundwork for the longer term recovery.

As a metaphor, this parable is so good that its found its way into a Buddhist canon, as well as a number of Islamic writings. The Western version by the American poet John Godfrey Saxe (1816 - 1887) is fitting enough for our purposes, and so lets end with moral of Saxe's poem:

Have a good day.

Barry Ritholtz

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