Here is another warning that this is NOT a normal time. I believe only prudent position is to go into cash or T-bills.
To: Tommaso (25923 )
From: Jeffrey W Grolig
Thursday, Sep 3 1998 2:34AM ET
Reply # of 26323
RE: MARTY ZWEIG....
Zweig has always impressed me as a scientific market researcher.
He is not a Guru like
Cohen, Fleckenstein, or Acampora.
You probably are familiar with Zweig's research of the stock
market over the past 100
years and the various correlates [I prefer this to indicators
because indicators are plain
voodoo, while correlates are items that consistently present in
certain trend situations
and may have predictive validity] he discovered in preparation of
his Doctorate Thesis.
He has some correlates that have been consistently found to occur
in virtually every US Bull Market over the past century. These
[set forth in his book,
Winning on Wall Street] include a liberal Fed Policy [ie rating of
3; indicating at least 2
discount rate cuts] and 2:1 up/down volume average over a period
of at least 10 days.
He also has found some common correlates of Bear Markets that can
be employed to
distinguish a Bear Market from a correction. While there is no one
common correlate of
all 19 Bear markets of this century, all of these turn out to have
at least one of the
following conditions: [THE THREE "BAD BOYS"].
#1. Extreme Deflation as defined by a decline in the PPI of an
average 10% per annum
over a period of 6 months.
#2. High Relative P/E ratios [ie usually in the high teens or
twenties].
#3. An inverted bond yield curve [long term rates lower than short
term].
If none of these bad factors are present that seem to herald a
Bear Market, Zweig
recommends buying freely into a 10% dip on the theory that a Bear
Market would be
unlikely.
If one or more are present, Zweig recommends not buying the dip as
the conditions
would be ripe for a Bear Market. Historical analysis shows us per
Zweig, that the Bear
markets that contained one of the 3 "bad boys" had a moderate
ultimate decline; on the
order of 30%.
History also shows that in those Bear markets with 2 "bad boys",
the average decline
was much worse to about the 45% level.
Finally, only one Bear Market in history had ALL THREE BAD BOYS
present---the
Great Bear Market of 1929-1932. This makes sense because the each
Bad Boy is a
signal of bad conditions for business and corporate profits.
Having all three present at
the same time is a Triple Whammy for stocks--and deflation is the
worst condition for
stocks, worse than inflation.
Here are the facts:
A). We are rapidly approaching an inversion in the yield curve.
[We will soon invert
IMO.]
B]. We have worldwide deflation as evidenced by rescession in
Latin Markets and the
drop in the CRB to a 21 year low [low oil, gold, metals etc--with
no sign of the trend
reversing]. Although the US has not yet met the Zweig definition,
I believe that the fall in
commodities worldwide signals worldwide deflation and an impending
rescession in the
US.
C]. The average P/E in Investor's Business Daily was at a high
recently around 26 to
30. This already qualifies for one bad boy.
In summary, we have one "bad boy" and Zweig would say based upon
the analysis in
his book therefore to NOT BUY into the 10% correction as
conditions are ripe for a
Bear market of a potential magnitude of 30%.
But look further. We have already dropped almost 20% on the dow
and it looks like
we will also have 2 more 'bad boys' soon, namely extreme deflation
and an inverted
yield curve; both very rare, but very treacherous conditions.
If history is any teacher , we all need to be EXTREMELY CAUTIOUS
as the only
other correction in history to have all 3 bad boys present
[extreme deflation, high PE
ratios, and an inverted yield curve] ended up in The Great Bear
Market of 1929 to
1932 and was down about 90% before the carnage was over. Will we
drop to 4000
dow? Based on the above, we may fall lower.
IMO, the media, Abbey Cohen, etc, are hyping naive investors into
staying in the
market while Fidelity, Vanguard, and the other major funds
evacuate. Since the "little
guy" on main street, and investment club investor seem to be
holding now and buying
into the dips [as they have been rewarded in the past by doing
so], with the
encouragement and "hand-holding" of their brokers [who have never
seen a Bear
market], I believe most of the longs will get burned, fried, led
over the proverbial cliff,
etc.
The Economics professors from Wharton and Yale [featured on CNBC
and not
hypsters like the unscientific "gurus"] that I have recently
listened to, have been making
similar dire predictions based on the worldwide deflation.
Although I have not heard from Zweig lately on his position, his
book makes clear what
he would say based on his research. IMO, I would be cautious,
maybe buy a few puts,
and stay in cash.
Good Luck to all,
Jeff
P. S. For those of you not familiar with Zweig, he employed his
analysis to correcly
predict the 1987 crash. About one week before that crash, he
purchased index
out-of-the-money puts with 1 % of his entire fund under
management. As a result, while
other funds were down 25 to 35% after the crash, the Zweig fund
was up about 8% !
|
