Sy Harding Market Outlook
Enjoy! Enjoy! But Pay Attention! Dec. 22.
Our Seasonal Timing System has gained 31.1% YTD with an index fund on the Dow used to follow it, or 23.1% YTD with an
index fund on the S&P 500 used to follow it. (We recommended either because the Dow and S&P 500 usually move in pretty close
tandem).
On a buy and hold basis, the Dow is up 23.3% YTD, and the S&P 500 is up 18.2% YTD. (All numbers include dividends, and
interest on cash when our STS was out of the market from May 10 to October 25).
Those are pretty impressive gains, well above the market's average gains over the long term. Our STS significantly outperformed a
buy and hold approach again this year, and did so with half the risk, by again being out of the market during the unfavorable season
when the market again gave back half its gains of earlier in the year.
Enjoy! Enjoy! The upside should continue. There's a ton of money on the sidelines to fuel more gains that should come in after
the first of the year.
There's the additional chunks of extra money investors will be receiving from Christmas and year-end bonuses, employer's year-end
contributions to their 401K plans, income tax refunds, etc.
Another big supply of money should be available from all the tax-selling that has been going on over the past month. The amount of
tax-selling caught Wall Street (and us) off-guard. With so many stocks so far down this year, (as bad as most bear markets, even as
the indexes have hit new highs), tax selling has been much more prevalent than in other years. Much of that money is now being
held out of the market short term until the Y2K situation becomes clear. But it should come barreling back into the market when, if
we are correct, Y2K turns out to be a minor nuisance, or even a non-event.
And we expect the small cap value stocks, many of which were already down 30% to 50%, and then got beaten down further by the
heavy tax loss selling, to make huge gains in the early months of next year, while the high flying, overvalued growth stocks, give up
some of their huge gains and some of that money shifts into the very under-priced value stocks.
Lastly, we're still looking for our original projection of something between 12,000 and 13,000 on the Dow before the favorable
seasonal period ends.
HOWEVER, we have to show you the following two charts, so you will know why we are paying very close attention to conditions
and our technical indicators, and why the favorable seasonal period could end early this year.
The first chart shows the serious negative divergence between the majority of stocks and the popular indexes.
Shown are the negative divergence in 1986 that was followed by the 1987 crash, the divergence in 1990 that resulted in the 1990
bear market, and the divergence in 1994, the last year the S&P 500 closed down for the year (although only fractionally). And then
there is the current divergence which began last year, and is now the most severe and longest lasting divergence since 1929.
It would be nice to think this time will be different, and that instead of the indexes plunging to catch down to the rest of the market,
that somehow the indexes could hold up there while the rest of the market reverses and surges to the upside to resolve the divergence
positively.
But that would be expecting a lot. History is against it. The very high overvaluations of the indexes are against a positive resolution.
So now you know why we believe our next sell signal will result in something very few will be expecting in an election year.
Election years tend to be positive, but the pattern is not strong enough to bet on, particularly in a year when an incumbent President
is in lame-duck mode. And as we have shown in previous charts, turn-of-the-decade years, (those ending in 0, have produced
recessions every time over the last forty years, and have the record of being the most negative year of each decade for the stock
market.
I'm reluctant to show the next chart, taken from my book Riding the Bear, as I don't want to be seen as an alarmist. However, it
would be just as irresponsible not to show it, since it does have such potential significance.
The chart shows the median gain of the Dow this century. The market spends 50% of its time above, and 50% of its time below, its
median trendline. The good news is that by just extending the trendline out a few decades it can be seen why the Dow will surely
reach 20,000 and 30,000, eventually, as so many point out. However, they are being extremely simplistic by ignoring what is going
to happen on the way to those levels.
Note that throughout the century, except for the 1920s and the 1990s, every time the Dow became over-extended above its trendline
to about the same degree (about 1/2" on this chart) , a bear market took place that pulled the Dow back down at least to its
trendline. Yes, all those little blips on this long term chart were bear markets of up to 50%.
Note how even in 1926, and in 1995, when the Dow became overextended to that same area it again began to flatten and look toppy.
This chart was one reason so many long time analysts expected a bear market to begin in 1995. But instead, in those two decades,
and only those two decades, something happened that caused the market to recover from the brief stumble and take off into the
stratosphere.
What were the catalysts? Well, we know that in the 1990s it has been the revolutionary break-through of computers and automation,
which has allowed businesses to produce ever more goods with fewer employees. That greatly increased productivity has boosted
corporate profits, extended the boom side of this economic cycle, and held inflation down.
In the 1920s it was an even bigger technological breakthrough, the introduction of electricity into everyday life. The result of
factories being lighted, machinery being run by electricity, and Henry Ford's introduction of the assembly line, boosted productivity
even more than computers have in the 1990s, greatly boosting corporate profits and extending the 1920s economic cycle. It became
known as the 'Roaring 20s', and had everyone convinced it was a 'new era' that would last for decades more. Of course the
enthusiasm reached such extremes, particularly in the stock market, that the resulting decline back to normalcy was a long way down,
created panic, and resulted in a 90% loss in the stock market, (which did not recover back to its level of 1929 until 1956).
Unfortunately in the 'roaring 1990s' we have enthusiasm and valuations, no matter how measured, at extremes even higher than seen
in 1929.
So, now in just two charts, you see why we expect the next bear market will follow our next sell signal, and in the 2nd chart, why the
potential is certainly there for the next bear market to be of the severe variety.
How severe is severe? Well, the eight worst bear markets of the century, excluding the big one of 1929 to 1932, averaged declines
of 45%, and that was in the stodgy stocks of the Dow, while the majority of investors have their portfolios in much higher risk, more
volatile, stocks.
So, again we say Enjoy! Enjoy! But Pay Attention! |
