You asked for it, I hope you have the patience to read through it (g).
The turnips apologize for a bad call of an interim retracement from mid November to late December. In the following, they are going to try and layout their thoughts on the markets for 2002. There are a number of parameters going into building the "scenario" including the political environment, international markets, liquidity and market psychology (TA) as well as valuation metrics. In the following, I will try and muse about these and then "design" what I believe might be a likely scenario for the market this year. I am not going to explain how these various parameters influence the "scenario" and the specific metrics.
Politics
The most important political event this year will probably be the congressional elections later in the year. Historically, such midterm elections do not have a major impact on the market and international politics may have a greater impact.
We have (currently) three major hot spots that could have an impact on the US economy, the War on Terror, the hot Indian/Pakistani situation and the Mideast conflict. Strangely enough, the India/Pakistan and Mideast situations have similarity, but going into these in detail will derail into political arguments forbidden on this thread. Suffice to say that without our own "War on Terror", these two other spots would not have gotten as close to the boiling point as they have. From an impact on the market point of view, the most important of these three is going to be the War on Terror. The Mideast conflict when it gets "hot" has a secondary impact rooted in the fear of oil embargoes, however, with OPEC operating at less than 75% of capacity and Russia still increasing output, I do not see an oil embargo as either likely nor feasible. Thus the Mideast will have only "ripple" impacts here and there during the year. I do not think that the Pakistan/India situation will evolve into a "full war" situation (despite major efforts by Islamic terrorist groups within Pakistan and Kashmir), and thus do not expect this to have an exogenous impact on the market. Some outliers and unlikely events might involve failure of Musharaf's regime and possibly a preemptive move by Iraq (see below) against Israel.
The War on Terror, will, however, continue, and eventually ends up with an actual conflagration on Iraq's soil later this year (Iraq may be tempted to "arise" the Islamic world to its defense by a preemptive move against Israel). Actual "hostilities" will not start before next September at the earliest, possibly later (it is a "bitch" to conduct desert warfare in the summer, and even a military buildup will have to wait well after July/August). For political reasons (elections) the actual military activities will probably start in October. These events, strangely enough, could precipitate a year end powerful rally in the markets.
Economy
As for the economy, I believe that the US will be the first to emerge from the current (business recession) with Europe and Korea to follow, and only a mild bounce late in the year in Japan (better run in Japan if they finally clean their books of stale debts). The extent of consumer participation in the next upleg in the economy depends a lot on the nature if any of an additional stimulus package. The current monetary and fiscal stimulus already in place should, IMTO, be sufficient to get the economy out of it's current contraction. However, because the majority of the stimulus was "bolus" like, its impact will dissipate in time and by mid 2002, the market will start and sense the second dip (the consumer led recession I have discussed a number of times). The exact timing depends on various parameters including the success or lack thereof of Europe's adoption of the Euro, the degree of Asian recovery and to some extent, the nature of an additional stimulus package if any.
I do not expect to see any inflation of major import in the next 12 months, that despite the battle cry of the "Austrians", that the monetary drunkeness shown by our Fed's can lead to nothing but debasing of the dollar and massive inflation. Fortunately, for those enjoying the long side of the equity market, a lot of that excess liquidity, will, at least for some time, flow into equities rather than chase "good and services". If you do not have tight supplies, then even excess monetary expansion cannot cause prices to rise in a worldwide open economy. Until we see much more consolidation and capacity extinction, inflation is not a "clear and present danger".
Even before 9/11 the market was awash in liquidity (MZM here, at around $5.6 T, is at 20% higher than it was coming into 2001), and indeed, we had some "string pushing" quite visible, after 9/11, even more liquidity was injected in the markets. This excess liquidity, however, will not by itself greatly stimulate demand, just enough to provide for mild GDP growth, peaking not much above 3.5% at the next peak (vs 6% often in the first or second Q after a "traditional recession"). The reason is that consumer are really stretched, the impact of real estate refinancing is going to end in the next six months (mortgage rates' lows have been seen for this cycle), and consumer are going to slowly rebuild their balance sheets. Thus the next "boom" is not going to feel much like a boom and big upside surprises will be rare and few in between.
Valuation/technical analysis
It is quite clear that valuation models (the type that George and Yardeni have been teaching us) are going to keep a ceiling on the market over the next 12 months. Yet, within these constraints, we must keep in mind few factors that are more technical in nature.
The September lows were accompanied by major capitulative signals, thus it should be considered a major bear bottom. Yet, the failure to establish that bottom with a strong retest prevented accumulation of inventory by "They". That accumulation will, however, be provided to "Them" in due time. Thus, I have the current bull move to continue until the "psychology" of the market breaks. I "see" two potential modalities for such a shift, buy panic (signaled by at least three/seven consecutive days of excessive reading in the tick on both the Naz and NYSE), and a more likely modality, a gradual buying exhaustion in which a series of tops, each lower than the other if not if heights, in momentum and strength indicators), lead to a major decline to retest the lows. Since I do not think we will be faced with the first modality, the scenario for the next twelve months, given below, assumes the second modality to be operative (the first modality would have induced the "to da moon" scenario with a high near 3000 on the Naz, but i view this modality as having a very low probability right now).
We have already had our first top at about 2065 (and 10220 on the Dow) earlier this month. In January I expect a run to at least 2123 (possibly 2160) and probably within the first two weeks. Then a mild decline (no worse than 1960 or so, probable bottom at 2010) lasting most of February. After that , I have two additional rallies failing around early April and mid May respectively. Both of these peaking around 2250 on the Naz (outside possibility of a top at 2388). Strangely, then I have the major decline of the year into late June (a bottom about a week or so before July fourth, make it around June 28th plus minus two day) to about 1650 on the naz. Wading around the bottom here during the summer months in the range of 1650 to 1940 (the first run, early in July potentially quite powerful), and depending on the evolution of our "War against Terrorism", another major bottom late in September or very early in October this one, possibly to 1450/80 on the Naz. From that Nadir, I have a straight move up of about 50% on the Naz to around 2150 or so by the end of 2002.
I have the Dow doing "better" and "worst", the high for the year, I have at 11350, but the low I have under 7500.
As usual, the turnips absolutely reserve the right to be wrong, change their mind and change it often.
Everyone is invited to post their own yearly scenario. I will not respond to requests to explain the exact rationale of this scenario.
Zeev |
