Jay
Was pondering over what US markets may do in 2005.
Comparison of US and Japanese markets does not give me a warm feeling. Please tell me that this is bear $h*t so I can enter 2005 looking up with a positive note.
Nikkei: finance.yahoo.com^N225&t=my
S&P 500: finance.yahoo.com^SPX&t=5y
If we apply a low pass filter on the Nikkei chart to eliminate noise variations it shows the following distinct phases:
1. top at 40000 in 1990
2. First major bottom at about 15000 in mid 1992
3. First consolidation trip from mid 1992-mid 95, trip between 15000 and 22000
4. Second consolidation trip between mid 1995 to mid 1998, trip between 15000 and 22000
5. Third consolidation between mid 1998 to 2001, trip between 15000 and 22000
6. Final hard landing from 2001 to mid 2003, breaking suport at 15000 to land at 7600, we are now looking at the previous levels as resistance in this consolidation phase and who knows when it will break from that, that is 14 years of toasted market
Although comparing against Japan has been dismissed by many folks it seems there is interesting broad similarity with S&P chart:
1. S&P peaks at 1500 or so in 2000
2. First major bottom in S&P at 800 at the end of 2002
3. FIrst consolidation trip in which we are right now, at 1200 or so up from 800 and the market seems tired
The Nikei sideway cycles were about 3-4 year duration (3 cycles over 12 years and the index ranged between 15000-22000 (7000 point range which is about 1/2 of 15000 where we hit the first major bottom).
S&P seems to have taken comparable time to hit the first major bottom at 800 and we are up to 1200 (1/2 of 800) in the first consolidation cycle, the similarity there is interesting.
If we were to follow the 3 year Japanese consolidation cycles, by end of 2005 or early 2006 we would be at about 800 on the S&P 500. It seems we would do at least one consolidation trip based on the prevailing economic conditions and market valuations (few weeks back I read an article from Bernie Shaeffer where his expectation was finding S&P 500 at 825 based on other considerations at the end of 2005). I expect the markets to do good in the first few months of 2005 but then retrace to the lower levels.
We could indeed be different from Japan in many ways some of which include:
1. We don't go down from here, don't consolidate and just go up, however the market inertia does not work that way and consolidate we will, I expect we will at least have 1 consolidation cycle before breaking out of that mode
2. We don't break down after consolidation (however long) like Nikkei but break up, this is possible. If we break down after consolidation we are pointing S&P to 400 which is a very hard landing; however, the housing bubble is still inflated and if we don't soft land that bubble I don't see how we may go up with current valuations
2. We don't have 3 consolidation cycles before breaking up or down instead we do a fewer cycles say 1 or 2, this is possible and the economy and markets will not linger sideways as long as Japan. This depends a lot on how we handle the economy going forward with Dollar value, housing etc
My take is that the concern at this point should be what we can do after we hit the major bottom in S&P at 800 in the first consolidation cycle and not break down from there to 400. The problem is that many of the policies currently in place indicate we may indeed prolong this, go into longer consolidation cycles and eventually break down. I want feel bullish about investing in equities/indices but I somehow can't. I don't trust the non-US markets and/or currencies to hold up either if the US markets go in a big swoon unless they are severly decoupled during long consolidation. Would like to hear contrary thoughts on this new year's eve.
Thanks
Hemant |
