Special Edition: Short & Long Market Outlook
Other than a very few numbers, I'll confine this to a brief overview. Bwahahaaaaaaaaaaa! Brief? Moi?
Last week, the mostly medium economic numbers and dovish comments from FOMC members relieved almost all downward pressure from the mkt. Only uncertainties about the oil supply, and the question about "1/4 pt or none" remain.
But only one thing can now occur that would cause us to retest Thursday's bottom.... if CSCO tanked badly with earnings Tuesday AH. That's not likely; CSCO has consistently beat projections, without exception. A slight miss would not test the bottom, but would put a damper on the optical sector..... again, the prospects favor that NOT happening.
Which leaves us to wonder what lies ahead.
Barring that CSCO catastrophe, no serious risks remain to warrant us moving to 100% cash for several weeks now. Historically, we could hit a mild downtrend likely to end by Thursday. But that is equally balanced by a historical pattern of a 7-to-9 day updraft from the August bottom, where all but 1-or-2 days move up.
History alone can't define this, so a look at current conditions, including some TA and my not-quite-perfect DOWdy barometer, yields these points:
1) The DOWdy is making an effort now to break out of a bearish wedge. A wedge is defined as a narrowing range, where the up and down ^v^v^v^v^ waves on the charts show the peaks and bottoms shrinking towards the center. It is trying to breakout to the upside. To accomplish this, an intraday high has to break above 10875 and a close above 10844 would also be a nice plus. Friday, DOWdy stopped just short of 10770 with a close clearly indicating it will conduct a higher test Monday. We'll look for the DOWdy to clear resistance at 10770, 10800, 10813, 10844 and 10875 ... and the latter is only 108 pts up from Friday's close, so a Monday or Tuesday test of the peak is very conceivable.
2) As I can see the shift in the DOWdy chart that suggests a 6 week upward trend underway, I think we'll break out of this wedge. But, while that signifies an overall bullish event, the day we break through is likely to produce a drop in NASDy the following day. Not to worry.... such drops are likely to be shallow. Lots of money can be made on any day that the NASDy doesn't drop by 150 pts or more.... and, barring that CSCO scenario, there's nothing visible in the past 3 months to indicate any chance of that kind of drop.
3) At 3787, NASDy has established pretty solid support at 3750 and 3650 with a moderate support level in-between, at 3700. Only a major catastrophe is likely to cause a retest of the 3650 this week. After this week, the next time of that risk would be October, if we run into a wall of bad earnings. At this writing, I expect no test of 3650 this week or in October. I think January will bring that test.
4) This will likely culminate my market ponderings for some time to come, unless bold new circumstances crop up on rare occasion. I'm pouring it all out here, all the mkt stuff and patterns I've uncovered in the past 5 months... believe it or not, this is the refinement & condensed version of tons more.
Instead, it's time better spent improving my TA and looking for great stockpicks. Boyoboy, I sure have been eager for this change!
Thus, here's the final outlook, some reiterated, and much that is better explained. Better set aside 30 minutes for it to digest properly ;^)
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The Gift you might want to save and pass on
I did not get into this newsletter gig out of a desire for wealth or recognition (or infamy, for my wrong picks & projections). I simply was a market ignorant guy who plunged in as the result of a kindness bestowed on me. Part of the funds to be raised were intended for a non-profit, charitable purpose and part was intended as an act of Love.
Immediately, I began picking up mkt. patterns, without a whiff of business training or experience. I could claim no credit for the insights I was being granted ... I might have a modicum of intelligence, but the extraordinary results were well beyond my capacity. In contemplation, meditation and prayer, I came to realize that as long as the uses of the funds raised were largely directed to good works (instead of wholly selfish purposes), the success would continue. And it also came to me that this gift was not mine and should be passed on.
I've made it clear before that I won't use this list to proselytize any particular set of spiritual beliefs. Mainly because I am so prone to error as a human being that I cannot give an absolute definition of this guiding force, nor do I wish to judge others by my definitions. I understand the diff between right & wrong with clarity.... and the other mysteries are best left to folks way smarter than me.
The only thing I hope will become clear is my belief that dedicating a portion of one's funds to good works just might improve one's odds of achieving success...
Now, giving away a historical pattern I've detected, to explain why I keep returning to this idea that January will suck, I've found in the charts a natural corrective pattern, explainable in our very nature as human beings. In a rising (or declining) market, optimism (or pessimism, in the converse case) eventually causes an extreme to occur... either a speculative bubble or a capitulation. Either event requires a correction, if a market is to remain healthy.
Dips typically occur around earnings time, and mid Sept-Oct, mid Dec-Jan, mid Mar-Apr dips are pretty consistent, along with a lingering May doldrum and a mid-July selloff into August. Those patterns should be anticipated by all traders ... if you always keep these in your head - despite the stuff mkt analysts spew - it should help you define the times when the use of margin presents the highest risk.
The added pattern I've found, that controls the larger bubble and capitulation extremes, is more interesting. I see a pattern that says every 9 months, the mkt will self correct around the same earnings times.... meaning the dip will be a little more severe than most expect.
We were due for one in July 99... and it did not come. As a result, the following bubble was so extreme that we got, in essence, a DOUBLE correction that began 9 months later, in mid-March 2000. Explains a lot, yes?
It also explains why, around December 11-12 this year, our next NORMAL mkt correction should be anticipated to begin. You should expect a peak around Dec 8-11, a week's dip, a week's rise to retest that peak (culminating the day before or after Christmas, no doubt) .... and then you'll likely find a coupla nice days on the last day of December/first day of January. Pretty obviously, the second week of January presents the worst risk of all, though.
The least stress you can experience, though, is to get out after the first week of December, play the 3rd week off the December bottom, play the final day of December, then stay out till the mid-January bottom, where capitulation and rebound has occurred... it'll be a pivot day that'll look like last Thursday.
This is not the only pattern of repetitive history that can be of use. Here's a few more....
1) Every time since 1929 that the Fed raises interest rates to 7%, a recession has followed within a very few months. EVERY time. We are 1/2 point away, so what the Fed does in August, November and December requires close attention (my thanks to Chris for this discovery).
2) The full weight of interest rate increases is felt 6-8 months after they occur. So the May-June increases will reach their maximum impact in Nov-Feb.
3) In Fall 1999, we had a record number of IPOs. That caused a record number of unlocks in April & May this year, which added more depth to our double-correction. Similarly, from June 21 (post-FOMC) through the week just finished, we experienced another record amount of IPOs. Thus, in addition to January earnings dip, the impact of interest rate increases and the 9-mo corrective cycle, we get the great unlock, to add fuel to the fire. NOW do you see why I expect a tough time from mid-December to mid-Feb?
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Now let me add a few more points worth considering....
Yes, I well recognize we are in the midst of a profound Tech Revolution. Tempering my natural optimism with a bracer of cold water, I am not among those who believe technology holds all the answers to the world's problems. Because humans err and we are the ones designing & controlling the technology. Some advances bring unintended consequences when we get deceived into believing in our omnipotence. Like when lightbulbs and cars led to pollution & drunk driving. Some advances will be wonderful, with few or no side effects. But some won't.
Still, I believe the Net buildout, the info explosion and the biotech advances should give us market opportunities for the next decade. But that does NOT mean we automatically get a market unimpeded. Over speculation, energy crisises, wars, natural disasters and bad economic policies are each capable of creating recessions, and/or, a market crash.
Our government put in place a series of protective measures during the Great Depression and since that time, our recessions have generally been 6-to-24-month events. Some of those protections were lifted in the past year (the Glass-Steagall Act). And the conglomeration of financial institutions seeking to consolidate banking, savings, loans and brokerage functions under one roof will present further challenges to those old protections. Never be so complacent to think "it can't happen here". It can. But for the time being, let's say that the risk of recession exists and a depression is not impossible.
When will the risks be highest? Now it's my turn to speculate. I haven't researched this thoroughly, but to the best of my knowledge, these things MIGHT be true....
1) New Presidents are not greeted with recessions... this might alleviate some of the risks in Jan-Feb.
2) Most recessions begin in May and October. My preliminary research found one February exception.
3) Recessions begin in odd-numbered years MOST, but not all the time. This is probably an irrelevant coincidence... but the Presidential Election cycle may be a factor that eliminates half of the even-numbered years.
As I said, I THINK these three are true; if so, next year and 2003 pose the greatest risks. As I noted already, despite the probability of a January correction, since a new President takes office then, it's unlikely that a recession begins there. Nine months after that is October 2001.... and combining all these particulars.... that's the point to be on guard. In fact, if January does an earnings dip - without a real correction - the Oct 2001 risk looms larger.
I'm no psychic and this is not meant to scare, but to inform you. I understand how addictive it can be to play the market daily. Perhaps my cautions about the next two corrective cycles can spare you much grief. Market history is pretty convincing. Long bullish periods ALWAYS end in market crashes, not corrections.
And, for devotees of TA (technical analysis), let's propose an imaginary scenario, using this three year chart:
bigcharts.com
Imagine that that March2000 peak is a left shoulder. Now, suppose that we come to a higher peak by December, or sometime early next year.... perhaps 5500.... and then we get a sharp correction after.... perhaps 4500. In TA terms, we'd now have a 'head'. If the third peak were to happen in September2001 and it falls a couple hundred short of that - say, 5250 - then we'd have the entire NASDAQ with a head-and-shoulders pattern over a period of 21 months.
TA would suggest that a long slide down would follow. Let's revisit the 27 year chart for a sec....
bigcharts.com
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The Historic Perspective of a Revolution
No matter how long the Tech Revolution lasts, remember that it does not mandate a perpetually rising market. In fact, that 27-year chart puts it in stark mathematical terms: we cannot expect a market to grow straight up. The doubling factor of exponential growth ... be it markets or populations... always leads to a collapse, not a gradual decline. That doesn't mean NASDAQ at 500 or so. We already experienced a 1 week tumble of about 1250 points, last April. Were we to tumble from 5000 to 2500 in a week, that's the kind of event that would wipe out fortunes and take the wind out of the market sails for several years.
Let's draw one more analogy before I quit. The Industrial Revolution is generally considered to have begun around 1750 in Great Britain. Watt's steam engine (1769) was the watershed event that began it. Large quantities of coal and iron permitted the development of canals and steamships, roads and railroads ... and with the gasoline engine and electricity towards the end of that era, the revolution was complete.
In America, the IR period is generally considered to have begun as Britain's ended. Technically, Eli Whitney's government contract to build a musket factory - the first application of the "Uniformity-System" of production using inter-changeable parts - heralds the beginning. But the manufacture of sewing machines & harvesters, Drake's oil well (1859) and the building of the transcontinental railroad (completed in 1869) were the watershed events at the beginning of the US revolution. Ford's successful use of mass production techniques for the Model T (1913), is considered the conclusion of the revolution.
From 1870-1913, 2/3 of the manufacturing capacity of the world resided in 3 countries: Britain, Germany and the US. The US was not a superpower at the beginning of that period, but was the leading economic power at the end, while Germany's share declined.
During the 54 years between Drake (1859) and Ford (1913), a number of recessions occurred anyway. From 1865-1929, there were 17, with 3 in the 1920s (the last began the Depression). Economists, per usual, differ on the reasons why, but gold fluctuations and ill-advised government protective tariffs clearly played major roles. The point I'm trying to make is that a profound socio-economic revolution was transforming us from an agrarian to industrial society, yet recessions could and did occur, well before the peak productivity of the 1940s and 1950s.
It's an interesting coincidence that 1913 heralded another key event besides Ford's.... the creation of the Federal Reserve System. From 1918-19, the transition from a war-to-peacetime economy caused a shortlived recession. May 1920 saw the rare event of a presidential election year recession, which cost the Democrats the White House. That was caused by a gold outflow and tightening monetary standards of the Fed in response.
During Coolidge's tenure, estate and gift taxes were cut, as were tax rates on the wealthy. This policy was to be repeated by Reagan in the 80s, as an attempt to stimulate the economy. Early warning signs of trouble existed though.
WWI, and the insistence of forcing the war's debts on Germany, caused Germany to print more money. That led to hyper-inflation in Germany, and an economic crisis there... and ultimately set the stage for WW2. But America thought it was untouchable.
>>You could see the confidence in the American economic system the statement of president Herbert Hoover on October 22, 1928.
"the greatness of America has grown out of a political and social system and a method of control of economic forces distinctly its own - our American system - which has carried this great experiment in human welfare further than ever before in all history. We are nearer today to the ideal of the abolition of poverty and fear from the lives of men and women than ever before in any land"
The "method of control" was the market, and in the US, Republicans remained committed to laissez-faire policies, a sentiment reflected in president Coolidge's statement, "The business of America is business. " Coolidge was speaking for each of three post WWI Republican presidents who believed the engine of growth was business, and the role of the government was to help the businesses grow. This could be seen in a number of government policies in the 1920s - a decade where the government issued injunctions against striking workers; the Supreme Court took the side of business in disputes concerning unions, minimum wage laws, and child labor; federal spending was cut more than 90 percent from wartime highs to reduce the deficit, and nearly 40 percent in 1922; and taxes were cut, especially for the wealthy.<<
Avid history buff's might want to read much more later, where I got that excerpt from:
uri.edu
In early 1929, unemployment was at 3.2% yet in Oct, the mkt fell by 1/3 in 2 weeks. In one year from then, unemployment had tripled. By 1932, nearly 25% were unemployed. (As a coincidental side-note, NASDAQ fell by a third in 3 weeks of March-April 2000, and stocks, that lost 80% of their value from 1929-32; experienced the same losses in a 5-10 week period last Spring!)
Thus, I maintain that the Tech Revolution does not protect us from market crashes or recessions. And the potential for a Depression? Well, that has been tempered considerably, by several factors. Post Depression, the FDIC, which insures deposits in banks, maintains a level of confidence in banks that prevents the kind of panics that escalate the crisis. After a crash in 87, which was escalated by automated computer selling of shares, curbs were put in place to limit the speed of selloffs, to permit time for rational intervention. And the Fed has matured in its thinking, to a large degree. It stands ready to infuse banks with cash to prevent a crisis in confidence at such moments. It did just that to stave off Y2k worries last Fall.
Another factor is to remember that the NASDy is NOT the market as a whole. Tech stocks are volatile because of absurd speculation and we've learned that it can withstand such shocks. The DOWdy declined a mere 7% during the 3 weeks that NASDy coughed up 35% (rough percentages).
That doesn't mean a Depression is impossible. The old gold standard woes are well behind us. But another commodity, oil, with its prices and supply levels, wields a lot of potentially disruptive economic power. If I recall correctly, we had a war 9 years ago about the stuff. (My eagerness for alternate energy to reduce our oil needs extends back to the 1970s for these reasons, well before I knew what a market was! Go PLUG, BLDP & CPST!)
The economic policies advanced by Keynes, which began with the New Deal and ran through LBJ's Great Society (and the subsequent period of stagflation (inflation in a stagnant economy) that characterized the 70s, held good ideas and flawed ones. The policies of Coolidge that preceded the Keynes, and resurrected as Supply-Side policy by Friedman (which I once derided as Reaganopoly) have considerable flaws, as well. Neither has proved perfect to avoid recessions, nor do they address the desire to predict them.
The factors to keep in mind in our quest to predict are observable conditions. Natural disasters, such as droughts, can point to trouble (wonder what would happen if the San Andreas fault dumped Silicon Valley into the ocean...). Global warming could advance droughts. Overpopulation and bad economic and military policies can provoke wars, which can boom & bust an economy. In our country, the best war preventative is the maintenance of a strong military. It's not a guarantee, though, because a madman with half a dozen nukes certainly could put a dent in our cash register. And, of course, there's oil supply & price; this has cropped it's head up repeatedly in the past 27 years.
For stock traders and investors more concerned with markets than national economies, oil is certainly a factor to watch. Another truly is the performance of the DOWdy. It advanced from approx. 10,000 to 11,750 between mid-Oct 99 and mid-Jan 2000, then fell to 9800 in late Feb-mid March. Remember how the New Economy devotees mocked that decline of the Old Economy barometer? Let's not repeat the error.
Historically, it's the rarest of events to see a recession or mkt crash in summer. Using memory instead of researching closely (I'm tired!), to put that in perspective.... out of 25 recessions, probably 13 have occurred in Fall, 7 in Spring, 4 in Winter and 1 in Summer.
Other factors that will impact the mkt in the coming decade include the retirement of Baby Boomers (Japan's boomers - a little older than ours - are a factor that aggravates a financial crisis that other factors caused), the peaking of solar flare activity in 2003-2004 (which can interfere with satellite transmission & wireless), China's adaptation to freer markets & uncensored info (Peking better duck!), the fresh acquisition of warm bodies & brains necessary to maintain the Tech Revolution ( education policies in poorer and minority schools, and immigration policies are prerequisites to this sustenance), and the capacity of Generation XYZers to find some balance between the tight-butt workplace policies of olden days (unnecessary, imho) and the wanton cashburn policies that characterize too many tech companies (thrift and self-discipline are good things).
Finally, realize that stunning market declines create a rocky market for some time after, because confidence in the market takes time to rebuild. Confidence may be a bigger factor than any other in assessing national and market economics (I believe this). A larger exploration about the critical nature of confidence's role in economic matters can be found in this 2-pg essay:
pei-intl.com
Wrapping it up and bringing it home, don't fear declines that may occur this week. I won't be surprised by a roaring or weak week. My obsession with predicting the market is about to end for awhile. In mid-Sept, expect the earnings warnings to cause some dips and horizontal trading... but the October dips are likely to be less than normal with the Fed locked out of the action by the Prez Race.
I already explained why Dec-Feb and Sept-Oct 2001 are the highest risk points ahead. That doesn't mean we skip the dip of April, which is often substantial... it merely means it's not likely to be a repeat of this year. Fear of that (there's that confidence issue again!) will have an impact, so don't be surprised by a sharp spike or two.
I hope you'll think of these things about 3 weeks in advance of every earnings season. Personally, I plan to save this and mark my calendar quarterly for the next 13 months ... a quick skim of it will keep me on my toes and, I hope, will stave off that odd-looking grizzly dog at the door that seems to want my lunch.
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And that's puh-lenty to digest this weekend.
Hope you have a fine one.
kevin |
