***BULL MARKET IS OVER***. The Hong Kong silver bullet will kill this bull market. Hong Kong was down 17%, rebounded to down 12%. Or more appropriately, the proverbial last straw that will break the camel's back.
As I look across equity landscape, every group except drillers, Internet & utilities are already in the process of breaking down. Even the drillers appear to have topped out. All it takes is a trigger for it to all come tumbling down. I also noticed de-coupling of equity from bonds, suggesting that deflationary threat has appear on someone's radar screen.
This market has taken some big blows recently:
Oct 8: Greenspan speech
Oct 9: German interest rate increase
Oct 10: PPI 0.5% increase vs. 0.2% expected
Oct 16: Intel earning short-fall and subdued forward outlook (announced the day before)
Oct 17: Compaq earning disappointment
Although after being knocked down each time, the market managed to crawl back up again, the market is weakened each time and is very vulnerable now.
Several Asian markets have been declining for a while. At end of August Hong Kong suffered four consecutive days of 5% decline (reversal on the 4th day). Likewise Japan had a meltdown in Dec-Jan. But the world barely noticed. I think this time the world will finally see.
The next few days provide a rare opportunity to predict the behavior of the world markets based on simple deductive logic, as the overwhelming factor on world markets will be this one event and its the cascading aftermaths. The myriad factors that usually intertwine to affect the short term market behavior will play second fiddle.
Like a chess player, I try to deduce the moves one move at a time, the counter move, and the counter-counter-move etc. My conclusion is that the next few days could be gruesome, and wll usher in a global bear market:
Tomorrow Oct 23 Thursday:
It's already tomorrow in Asia & Europe.
Asia: Hong Kong already crashed. Much of Asia did not pay notice.
Europe: Markets initially showed little reaction. Markets opened mixed to slightly down as I started writing this post. However, as I am finishing this post the markets are down significantly now.
U.S.: I had thought U.S. will open
1) either down less than 50 pts to slightly up to allow the xenophobes and egomaniacs among us, who think US can stand alone when the world collapsing around us, to buy from the big boys before the market dives,
2) or
a) open limit gap down >150 pts to allow those of us who insist on selling immediately to get a bad price;
b) followed by immediate rally, to dissuade further selling and encourage buying;
c) only to dive in the afternoon
I had hoped it will open only slightly down, so I can sell what little stocks I have left. (I've been almost 100% in cash since August 7, except some very short term trades of less than 2 days to catch some short term moves). But given Europe's late reactions, I think a limit gap down open is more likely.
Oct 24 Friday:
Hong Kong: Expect reflex rally to recover about half of Thursday's loss. Expect China/Hong Kong governments to either make announcements beneficial to the market, or directly buy stocks to support the market. The China/Hong Kong governments have combined Foreign Exchange reserve of about $200 Billion. This free fall must not be allowed to continue for another day, for it would aggravate already massive panic and disruption to the economy/society. Furthermore, Chinese leaders don't want to lose face, to allow complete collapse of Hong Kong only 3 months after taking over Hong Kong.
Rest of Asia: Delayed reaction to Hong Kong plung will set in. Expect markets to be down not insignificantly
Europe: Expect reflex relief rally, in reaction to Hong Kong's bounce.
U.S.: Expect reflex relief rally. Open gap up about 100-150 pts. However, as reality sets in, expect the market to lose all of opening gains and then some, to close down by an equal amount.
Oct 25-26, weekend:
Expect extensive press coverage of world's economic problems and the deflationary threat. As the public and the MM become aware of the specter of deflationary threat and hints of depression, the stage is set of Monday. A momentous day that we will remember.
Oct 27, Monday: After the weekend, the world has learned of the scope of global economic problems. The mood will be gray. Reacting to losses in US and this new realization global problems, the psychology will extremely negative. Except significant losses to start in Asia, and cascading around the world, culminating in a 500 pt loss (550 pt to be exact) in the Dow and shutting down of the market early. I think the current twin trading halts are so poorly thought out that it ensures the Dow will go down 550 pt on this day.
Hong Kong: Expect to be lose much of Friday's gain to retest the low.
Rest of Asia: down a good percentage
Europe: down a good percentage
U.S.: The losses in Asia & Europe will only reinforce the extremely negative psychology.
-- Expect U.S. to gap down 100 pts or more,
-- quick rebound to recover half of the early loss,
-- start losing steam again,
-- as loss mounts, the downward momentum increases
-- as the Dow passes around -270 pt mark, we are beyond the point of no return.
-- expect down move to accelerate toward the -350 halt, as if a long distance traveler after seeing a rest-stop, decided to go the extra mile and rush to the rest-stop.
-- market halts for 1/2 hr at -350. It will be in the afternoon by this time.
-- The unprecedented market halt sends shock wave around the financial world. During the halt, everyone will be getting ready to sell as soon as market reopens.
-- As the market reopens, it will race toward -550, expect this -350 to -550 move to take only about half an hour. The 2nd halt will likely to happen late in the day and the market will never reopen and be shut down for the day. The way the twin trading halts are designed will act like space-warp gates, warp in at -350 and out at -550.
-- If however, the government (Greenspan, Clinton, Rubin, Summers) could react fast enough to make some supportive announcement during the 1st halt, the 2nd halt will not happen.
Oct 28, Tuesday:
The shock wave of the historic US market shut down from a 550 pt loss will reverberate around world causing big losses throughout Asia & Europe:
H.K. & Asia: the shock wave amplies with plunge of each additional market. expect 5-10% loss in major markets
Europe: the shock wave amplies with plunge of each additional market. reacting to losses in US & Asia expect 5-10% loss in major European markets as U.S. opens.
U.S.:
1) reacting previous day's loss & market shut down, all the media attention overnight, and the big losses in Asia & Europe, expect U.S. to open limit gap down.
2) However, most investors are conditioned to buy on big dips, and there are too much vested interest to prevent a crash of the market now. I expect all the big brokerage houses' gurus to come out to make supportive statements. Therefore, expect a sharp rebound to ensue after plunge at the open. Because I think this is going to be the last big rebound of this 7-yr old bull market, I think this rebound to be especially powerful. Expect the rebound to reclaim all of the morning loss & about half of Monday's loss. A Fibonocci retracement.
As I warned last week to expect sharp losses of several hundreds pts days soon; however, don't expect a market crash a la 1987 23% decline day:
techstocks.com
Oct 29, Wednesday: The big rebound in US will dramatically improve the sentiment and cause big relex rebound around the world
Asia: expect Hong Kong with its fresh big loss to rebound the most-~10%, while other major markets to rebound ~5%.
Europe: expect major markets to rebound ~5% from Tuesday's low.
U.S.: the good sentiment, resulting from the big Tuesday rebound amplied by big gains around the world, to carry over to early morning trades.
expect the market gap up 100 pt in the first 1/2 hr,
however, as realty sets in, expect the market to head back down to close down 100 pt. A Fibonocci retracement to a Fibonocci retracement.
Oct 30, Thursday and beyond:
I can't make any more deduction on the day-to-day moves based on this H.K. crash. Market will go up and market will go down. I believe the bull market is over. We face with serious global problems. The specter of deflation and depression looms. Although I believe the policy makers are much smarter now and will not make the mistakes that their counterparts made in late 1929-30 that lead to the great depression.
If the market aren't so overvalued, we will have much less problem. In fact, our problems are caused by overvaluation of financial & real estate assets that have prevailed in recent years. These overvaluation lead to over-investment, speculative investment, greater-fool-theory investment, and investment not based on financial returns. It is these type of investments that is causing global deflation and competitive currency devaluation and the threat of depression.
I have long been a believer of the "new paradigm" & the "new age economy", although not in so many words because I never heard of the "new age economy" back then. I believed "this time it's different", because of technological advances & reduced barrier to global competition, we were able to have dis-inflationary growth without sparking the usual business cycle worries--commodity & wage pushed inflation resulting in higher interest rate to clamp down inflation and then business bust.
There are perma-bulls out there who believe we are in a "new paradigm" and "new age economy". Nonetheless, they proclaim that the bull market will roam until inflation appears; since inflation is dormant, this bull market will continue in the foreseeable future. To me, these gurus sound like the general fighting the last war--the Polish general who ordered the cavalry to charge against German tanks. In my opinion, if one believe in the new paradigm, one should look for danger in deflation rather than inflation. In this scenario, expect market crashed around the world, and currency crashed around East Asia. In the U.S. some industries will be hurt badly: heavy capital equipment makers-(heavy construction, airplanes, oil drillers) especially equipment for high growth industry-(Semi-Equipment), and commodity producers with Asia compeitions-(steel, paper, D-RAM, Disk drives).
This specter of deflation and competitive currency devaluation is virulent. I think the die is cast for global bear market and recession. For our sake, I hope the policymakers will not make mistakes that lead to depression. For example, a 1/2 % rate cut in the November FOMC meeting will do a great deal in slowing this vicious cycle. A rate cut will not save us from global bear market and recession, but it will help prevent panic and alow more orderly decline of equity and the currency markets. Such a significant rate cut will punish the currency speculators, and reduce the ammunitions at their disposal to cause panic currency/stock market collapse around the world. The UPS strike is most unfortunate in many respects, and it may give the Fed cold feet in cutting rate now. Civilization is at risk and the Fed should so the right thing now. Furthermore, the global recession and deflation will certainly reach US and dampen any potential inflationary pressure in US.
Asia has been the scene of many wars and social unrests. Asia has being relatively quiescent in the past 2 decades, because every one has been too busy pursuing prosperity, and no one wants to rock the boat. Should Asia gets into depression, the political situation will be dicey in several countries. If that scenario were to unfold, God help humanity! |
