Quickly, get the Prozac for bipolar markets!
Back in the good old days - just as recently as a year ago - every piece of marginally good news created euphoria and stock prices surged. Irrational exuberance became the fashionable term to describe this period. Often companies with no earnings saw their stock prices surge. Indeed, just the expectation of higher revenues and future earnings (down the road in five years or so) put high tech and dotcom companies in the stratosphere.

What has changed? Companies going for $80 a share like Etoys are now selling at 25 cents a share!? Glamour stocks such as Amazon, Yahoo, and AOL have fallen off a cliff. While it is true that many of these companies were selling at ridiculous premiums, it is probably also true that some of the declines are overdone. Irrational exuberance has given way to irrational depression.

It is hard to believe that every earnings report should induce investors to reassess the valuation of all companies in the industry. For instance, Gateway issued a warning for the coming quarter, and most computer makers declined in turn. Just a few days later, Dell and Apple issued similar warnings. Once again, the stock prices of all the computer makers, some of them much larger, declined on the news.

So how should a long-term investor consider current market behavior? It is possible that all the bad news is not quite discounted in the market place. We've yet to see some poor GDP growth figures (less than 2 percent). But never fear -- the negative market psychology may once again turn positive in the new year. It may take more than one Fed rate cut to do it. And remember, the market is likely to turn around when things are at their bleakest! Note the rhetoric though. More and more analysts are talking like bears. The sign for a recovery is when market psychology is most negative.

The DJIA appears to be hiding, but look closely and you'll see that this 'old economy', over the hill index is the strongest performer this year. The Russell 2000 and the S&P 500 follow closely behind. Only that new economy NASDAQ composite index is trailing by a landslide.

Treasury yields drop on equity bear market
The bond market continues to rally even as yields seem to reach new lows for this cycle. Treasury securities initially rallied on the indications the Fed would probably revert to an easier policy stance. The fact that the Fed didn't reduce rates at the December 19 FOMC meeting was bearish news for the Treasury market on Tuesday. However, the equity market suffered more dramatically than bonds. As a result, bond investors benefited by a flight to quality towards Treasury securities and away from stocks. Investors do expect the Fed to reduce rates at the next meeting in January. The general rule of thumb is that the Fed won't just change rates once. If they are going to cut rates, there will be at least two - and possibly three - rate reductions in the first half of 2001. This can only be good news for the bond market.