Today is Pioneer Day, a state holiday in Utah. It is in recognition of the Mormon pioneers who first arrived in the Salt Lake Valley in 1947. My own ancestors were among those who arrived shortly afterward and I often wonder what their reaction might be if they could see what this area has become.

Currently we have analysts and economists arguing about whether the economy is in recession or not. We worry about the cost of oil and wonder if we will have to go from four cars to three. As a nation we have become so wealthy that it is all a bit surreal. Is it any wonder that the rest of the world looks at our lifestyle and either hates us for it, or covets it, or both?

Below is a chart showing the price movement of the Nasdaq over the past five years. I added the red line to illustrate that one could make the argument that the market is really just about the same place as it was at the start of 2004. Interestingly, throughout most of this period most people believed the U.S. economy was in pretty good shape. Yet many buy-and-hold investors during this period would have struggled to see any significant gains.

 
To me, this helps illustrate the need for active management. During this period the Nasdaq has made significant moves both up and down. Investors and managers who can properly read the market had the potential to make some profits during those periods of volatility. Of course, even better opportunities have occurred in specific market sectors like energy, precious metals, or bonds where periods of longer trends have allowed astute investors to capture better gains.

Considering the significance of the economic obstacles that currently exist, one could argue that the financial markets have held up fairly well. Although the major indices have seen double-digit declines from their recent highs, the losses so far have not been anywhere near as serious as those experienced in 2001 and 2002.

The next intermediate cycle is likely to provide a critical test. If the Nasdaq can hold support at or near this 2,200 level, that will be good news for investors. That should be a sign that the economy is holding its own and we could see a more significant rally before the end of the year. If it breaks below this critical support then a more prolonged slide is likely and we could see major indices end 2008 near their lows for the year.
F.S.