What's Next For Equities?
Sure seems like there is alot of complacency out there and alot of people calling for a rally. I expect one at some point but I'm still not seeing a bottom. Yet many stocks have indeed rallied as the selling pressure abated over the past few weeks. There is no new leadership and that is a problem. It's the same old oil, metals, transports, export driven industrials and the like. A vibrant long term future needs to see technology, biotech, financials, housing, consumer cyclicals and retail participate. I'm not talking about a rally but rather a refresh and start of a new bull market many are calling for. Metals, energy and the transportation stocks minting money shipping them aren't what great economic prosperity is built on.
The bulls are out crowing about the sentiment readings yet they have nothing else to support their arguments. (I posted my thoughts on sentiment back in June. You can see it in my archives.) These people rely on gut feel or simplistic measures to try to pick bottoms. Gut feel would have missed a 400% rally in the Great Depression because there was absolutely nothing positive in anyone's gut. The bulls were saying the same thing about sentiment in October of 2005 yet many of the stocks we need to see lead the market higher are lower than they were in October. Lower highs and lower lows is not a good thing. That was the argument used after 2000 and we saw where that ended up. Nearly down 80% on the Nasdaq before we were done.
Economic data is poor and the stock market internals are not very good to say the least. That said, we've had situations that were arguably worse than this IN THE U.S. since 2003 and have rebounded so market strength is not necessarily a barometer that is reliable in itself. But, we still have not had any buying pressure to speak of while dumping of shares continues to happen, albeit, it has slowed in recent weeks. Remember, nothing goes straight up or straight down. Buyers will step in on downward slides when they see value or selling pressure could simply abate. On upwards moves sellers will take profits or buying pressure will abate at some point.
International stock indices are driven by American money to a large extent. Hedge funds in Europe, America and offshore are fueled by alot of American money. In many instances, the volume in many countries is substantially made up of foreign trading volume. ie, Hedge funds and big American, and to a lesser extent, European money. So, it could be argued the same investors are driving all international markets. That certainly makes sense because all international markets are highly correlated up and down this economic cycle.
Ok, using that background, what is the definition of a bear market? It is pretty well accepted that a bear market is a correction of 20% or more that lasts some period of time. Uh, India, Russia, Saudi Arabia, Dubai, Brazil, Japan, Korea, Thailand and a few others have seen corrections of close to 20% or more in the past two months. If those indices are usually the first to show signs of weakness because risks are significantly higher in many underdeveloped markets, what does that portend for US equities? Maybe nothing if all of these markets snap back to new highs. Don't count on it. If not, they are likely signaling increased risk and a bearish future for all stock markets.
I'm pretty confident we are just starting a downward slide that will likely have fits and starts. If I am right, I'm anticipating a bottom in equities some time in the October of 2007 time frame with housing to follow with a bottoming in the March of 2008 time frame. This is based on mathematical calculations of certain time series data which has proven historically accurate and is simply a framework. Yet, remember, the worst bear market historically took 7.5 years to bottom. It's quite elegant that my work lines up quite well with such a scenario. And, given the blow off into 2000 was so extreme, I would expect we are going to retest the 2002 and 2003 lows if not surpass them before we head back up. If this scenario does unfold, the Chicken Littles will be talking the end of the world but it will likely represent the best buying opportunity in over thirty years.
Economic forecasting is very difficult but frameworks for equity pricing action aren't as difficult to forecast. But it should be noted that predicting what will happen two years from now is simply a framework and it could change tomorrow. How would it change in my work? If we saw international markets and American markets make new new highs. Not marginal new highs by 1-5% but convincing new highs. Of course, I don't think we'll see either. Until we see that, I am comfortable with my framework. I don't trade off of it but it does help me develop my risk management practices unless I see something to refute it.
The bulls are out crowing about the sentiment readings yet they have nothing else to support their arguments. (I posted my thoughts on sentiment back in June. You can see it in my archives.) These people rely on gut feel or simplistic measures to try to pick bottoms. Gut feel would have missed a 400% rally in the Great Depression because there was absolutely nothing positive in anyone's gut. The bulls were saying the same thing about sentiment in October of 2005 yet many of the stocks we need to see lead the market higher are lower than they were in October. Lower highs and lower lows is not a good thing. That was the argument used after 2000 and we saw where that ended up. Nearly down 80% on the Nasdaq before we were done.
Economic data is poor and the stock market internals are not very good to say the least. That said, we've had situations that were arguably worse than this IN THE U.S. since 2003 and have rebounded so market strength is not necessarily a barometer that is reliable in itself. But, we still have not had any buying pressure to speak of while dumping of shares continues to happen, albeit, it has slowed in recent weeks. Remember, nothing goes straight up or straight down. Buyers will step in on downward slides when they see value or selling pressure could simply abate. On upwards moves sellers will take profits or buying pressure will abate at some point.
International stock indices are driven by American money to a large extent. Hedge funds in Europe, America and offshore are fueled by alot of American money. In many instances, the volume in many countries is substantially made up of foreign trading volume. ie, Hedge funds and big American, and to a lesser extent, European money. So, it could be argued the same investors are driving all international markets. That certainly makes sense because all international markets are highly correlated up and down this economic cycle.
Ok, using that background, what is the definition of a bear market? It is pretty well accepted that a bear market is a correction of 20% or more that lasts some period of time. Uh, India, Russia, Saudi Arabia, Dubai, Brazil, Japan, Korea, Thailand and a few others have seen corrections of close to 20% or more in the past two months. If those indices are usually the first to show signs of weakness because risks are significantly higher in many underdeveloped markets, what does that portend for US equities? Maybe nothing if all of these markets snap back to new highs. Don't count on it. If not, they are likely signaling increased risk and a bearish future for all stock markets.
I'm pretty confident we are just starting a downward slide that will likely have fits and starts. If I am right, I'm anticipating a bottom in equities some time in the October of 2007 time frame with housing to follow with a bottoming in the March of 2008 time frame. This is based on mathematical calculations of certain time series data which has proven historically accurate and is simply a framework. Yet, remember, the worst bear market historically took 7.5 years to bottom. It's quite elegant that my work lines up quite well with such a scenario. And, given the blow off into 2000 was so extreme, I would expect we are going to retest the 2002 and 2003 lows if not surpass them before we head back up. If this scenario does unfold, the Chicken Littles will be talking the end of the world but it will likely represent the best buying opportunity in over thirty years.
Economic forecasting is very difficult but frameworks for equity pricing action aren't as difficult to forecast. But it should be noted that predicting what will happen two years from now is simply a framework and it could change tomorrow. How would it change in my work? If we saw international markets and American markets make new new highs. Not marginal new highs by 1-5% but convincing new highs. Of course, I don't think we'll see either. Until we see that, I am comfortable with my framework. I don't trade off of it but it does help me develop my risk management practices unless I see something to refute it.
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