Mike, the technical picture help me try and understand what might change in the fundamentals. By the time we, the little guys, get to see the fundamentals it is often to late. So, yes, what has changed is technical so far, first we had a very long string (I counted 7 consecutive days) of negative ticks (more than 1200 in all cases) at the top of the market (late July), these should have been followed by a powerful rally at least to 8900, it did not and we had only one day with a positive tick exceeding 1000. A string of extreme negative ticks during a bear market usually signal to me a turn, a string of such negative ticks at the actual top of the market indicates to me that the bullish money has changed its mind. Add to that the divergence (transportation, financials and few others) I mentioned and that brings you to the conclusion that something has changed fundamentally. The question is what?
I always said that what will break this bull market is a recession, and I believe that the fear of a recession is apparently raising its head.
The natural question would be, what happened to the thesis of liquidity and the fact that lower interest rates justify a higher premium on forecasted earnings? Well, the liquidity will come in and lower interest rates, but like in any bear market, the PE will contract (and sometimes these contract to ridiculously low values) because in a recession earnings contract. Let us assume that indeed interest rates are going to 5%, that would justify a PE of 20 on stocks, if the stocks are going to keep their earning power, but if the stocks are going to have earning contraction, you may see PE of 15 or so on those forecasted contracted earnings. To get us to a target of 7200 (my target for a low in this bear market, which could of course, be changed by my bearish turnips) all you need is a PE of about 17 to 18 on current earnings which if we indeed are going into a recession are high relative to earnings next year. On the S&P the picture is even bleaker.
What else has changed fundamentally? Well Asia is not mending and Japan refuses to take the responsible role of "leading economic locomotive" for the rim, plunging the rim into a depression. The last pronouncement from the Japanese sages was "hey we are in trouble so we should have to increase our exports", no that is not the solution, increasing their export hurts the rest of the rim countries (competing with them in ours and the European markets), they should increase final demand and IMPORTS from the rim. The fact that none of this is happening or going to happen (at least, that what the markets seems to fear), is indicated by the fact that there are now 7 Asian markets hitting new multi years lows (Philipines, Malaysia, Thailand, Singapore, H-K, New Z, and India and you should add Russia) and Japan, S-K and Taiwan as well as Australia are not far behind.
Zeev |
