Mid 2003
Okay, it’s second quarter options expirations week and the Dow is at 9300, the Naz is above 1650 and if the S&P gets any more “neckline” activity, a coughing fit may occur. In one camp, we have some lathered Bulls. Look! The averages have crossed both the 50 and 200 day MAs. Why the 50 has even crossed the 200. What more do you want? The new bull is here; the bear is dead. Next stop, Naz 2000, then 2500. “Up, up and away!
Meanwhile the bears (all 16% of them) say wait a minute. Look at the economy. This market is based on hope – pure and simple. It assumes a spectacular second half recovery. Well, the second half is almost here and where’s the recovery – somewhere between weak and nonexistent. This market, supported by nothing but hot air, is at exospheric (higher than stratospheric) valuations and over ripe for a fall. New lows are in the offing. Watch out below!
Well, suppose bulls and bears are both right and both wrong. The bulls are right that the market’s technicals have signaled a market change. The long downtrend that began from the 2000 market peak has been breached. Any bear that was using some kind of Short and Hold strategy is in big trouble. OTOH, the bears have a good economic argument. After massive pumping with excessive liquidity sloshing around, the economy has managed only the most tepid of recoveries. Moreover, the pumping has started to produce problems. There simply is no room to lower interest rates much more. Yet, without the recurring force feeding of constantly lowering rates, there is doubt about the continued viability of the both the housing/mortgage refi mania and the bond bubble. And then there’s the dollar. While there is more than a touch of cynicism in the calls for a strong dollar, eventually the Fed will have little choice, but to react - unless you think $10 to the Euro is acceptable to them.
So both the bulls and bears have merit in their arguments about where we stand. It’s in where they think we’re headed, that I suspect that both may be in error. The bulls say up, the bears say down. Suppose we do neither. Remember the market “screws” the maximum number of participants. If you include all of the bulls and bears currently making bets that we go up or down, that kindda looks like a majority. So how about a sideways oscillation. That way the bulls lose because this rally has about “had it”, and the bears lose because there is no large fall. So, no fall until the Fall (the season), and even then not a fall to new lows.
I’m a big one for looking at historical precedents. Since I believe that we are somewhere between the delusion of a market top and the despair that marks a valuation low in prices, let’s consider what has happened before in these circumstances. The ’29 to ’32 plunge is not relevant here I believe, both because of a very different Fed reaction at that time and a very different demographic profile driving the spending pattern of the populace. So lets consider both the plunge from delusion to despair that occurred in the ’66 to ’82 secular bear and the fall in the Japanese market from its high now more than a decade ago. Both of these markets reflect massive intervention on the parts of central banks, and the ’66 to ’74 valuation plunge (visible on inflation adjusted data),
dogsofthedow.com
has a similar demographic induced spending profile to what obtains today in the US.
First in Japan – see the second diagram in
contraryinvestor.com (Thanks Scott for the “interesting read”.)
note how in ’93, after a major plunge, the Nikkei had a rally near the end of the first quarter. The index not only rallied through its 50 and 200 day MAs, but it also experienced the Golden Cross of the 50 day over the 200. Instead of a new bull, however, the market went on to test lows in the fall – a future that I believe lies in front of us. In fact, as the third diagram exhibits, the Japanese market went into an eight year trading range. I doubt that our own market will be quite so lethargic in resolving the indecision implied by a trading range.
Now, let’s return to that inflation adjusted Dow chart from above. Note how contrary to what occurred in the ’29 to ’32 plunge, the ’66 to ’74 plunge was “paused” by a two tiered plateau. At both tiers, the market entered a sideways pattern. If I had to guess (and it’s only a guess), I believe that the market has entered a range bound pattern that may last until near the end of ’06. I believe the market still has an appointment to reach - its despair valuation low in the late ’07/early ’08 timeframe - corresponding to the precipitous fall of in consumer spending that will be occurring then. This will cause the eventual resolution of the trading range to be downward - just like the Japanese market. Until then, enjoy the roller coaster.
As always, JMO
lurqer |
