Stockoperator--Appreciate your thoughtful comments. I have a sister-in-law, who is a permabull, who doesn't believe much in technical analysis. Here is my response to her, which I thought might be of general interest.
Your comment on "Wish we could predict the future!" motivated me to put down some thoughts. I wish I knew the future perfectly. While one cannot know it perfectly, one can certainly reduce the degree of uncertainty. I played the market as a mania. Correctly, it would seem. I started early, going 100% in stocks after the 1990-91 recession. While it was being crazy positive, I went along. There was no denying that there were rational reasons for believing in the new economic era. There was no denying globalization and America's position in the world economy. There was no denying that baby-boomers were concerned about their retirement and looked to the stock market as the savior. There are productivity advances that are making it possible to have a higher rate of economic growth without inflation. A convergence of technologies was upon us that have greatly advanced productivity. There was no denying that we were in a new technological era. The convergence of technologies made it possible to deal with Y2K without any difficulties. When there wasn't any Y2K problem, as I predicted there would not be and am quoted in the press as saying, I really began asking why. The answer was that corporate America bought a lot of new stuff. Suppliers of this stuff had their earnings inflated beyond what they would be when corporations were not buying new stuff. Furthermore, the computer stuff they were buying was higher in quality, deeper in storage capacity, and faster. Maybe we don't need a two-year replacement cycle. Maybe 4-5 years will work. We are seeing the results of that now.
Furthermore, I read the columns of people I respected who were not buying all of this bull b.s. These are the Fred Hickey's, who was a featured interviewee in Barrons recently, and Bill Fleckenstein, who you used to see on CNBC in debates with Joe Battataglia (sp?). They stopped inviting Fleck when he wouldn't get off of his bearish tone. I also checked to see if these guys were permabears. They are not, but they are pretty bearish and remain so. I was reading about the potential nuclear winter in tech stocks a year before prices began to plummet. Now I don't believe everything I read, but I do set up hypotheses based on what I read and look for evidence in support or denial as the passage of time unfolds the evidence. The new-era outlook, as I said, I believe in. At least, I hypothesize that it could be true that we are in this miracle new age, that things are really different this time, and that we can easily justify these extremely high P/Es on the basis of the new era. I then look for evidence continuously. I also looked for evidence on whether the new economy features of the Internet were real or imaginary. I thought imaginary. I asked myself just how different is Internet ordering from mail-order catalogs. I knew that not a great deal of total sales is through catalogs. That set the tone to me. Still, I wish that I had owned Amazon on its runup to $200. The B2B stuff I think is real, I think, but it will take time to unfold.
I also have a market signal that I have developed. It is not perfect, but it is quite good. In conjunction with fundamental and sentiment evidence I compile, it helps a great deal in knowing when to be in the market and when not to be. It has saved my bacon many times. But, it is not the only thing I want to rely on.
My job is to follow the economy and I have developed sophisticated tools for doing so. This is my education, training, and 30-year occupational pursuit. The economy, despite recent words to the contrary, is not the stock market. But the stock market is a reflection of the economy. Overtime, there should not be great divergencies between them. Since August, these tools have demonstrated a clear downturn in the economy. I update these models monthly and will be looking for signals of an upturn. I have also seen a considerable extension of debt by households, businesses, and countries that worries me.
I also believe that markets tend to get overextended, that the time to sell is when the taxicab drivers are following stocks with their cell phones while on duty and that the time to buy in bulk is when no one wants to talk about or think about stocks. We are at neither of those times now. If the economy goes into a full-fledged and deep recession, there is little reason to believe that even the old economy stocks will hang in there, as they are now doing. If there isn't some consistent good news on tech stocks, there is little hope of them even holding these 60% down from the top lows. Despite how low it has gone, the Naz could go lower. You might want to read Schaeffer's special commentary on the web: schaeffersresearch.com. It's free. As he states, the market will do what it wants and nothing will surprise him. But he thinks there is a 20 percent downside in the S&P 500. He also notes that he missed the turn at Naz 5000.
My hypothesis about where we are right now is this. The Naz had clearly imploded and money has rotated to old economy stocks. They didn't go up as much as the Naz and they will not fall as far. But, the economy is in a definite slowdown and it is unclear how deep and longlasting the decline will be. Evidence arrives on a daily basis adding to the stock of data available to appraise the depth of this downturn. For now, I am in the camp of slow growth, but no recession, largely because of the primacy of the service sector in our economy. Manufacturing will be in a distinct recession, as measured by declining real output. The risk is now to the old economy stocks. Preannouncements in large old economy stocks will be a prelude to an extended decline. Old and new economy stocks still maintain, in an historic context, very high P/E ratios. Sentiment wise, despite the downturn in the Naz and a basic failure to learn the lesson, the public still believes that Greenspan and the stock market will come to their financial rescue. That concerns me. Also a concern to me has been all of the lying going on out there. If there is a complete washout in stock values, I think the public accounting profession, upon which we as a public bestow great authority and responsibility, will have a great deal of explaining to do. How many quarters in a row can GE beat the estimate by a penny. Damn those people are good.
There will always be money making opportunities in the market, even in a secular-bear market. Right now, with all the declines that have occurred (down 22% on Naz in Feb), I think that there could be a short relief rally. The ability of the market to hold present levels above 10300 Dow, 2100 Naz and 1215 S&P500 gives me hope that a relief rally, potentially short in duration, will occur. The market has taken quite a few blows to the head recently and still has been able to hold these levels. I don't forsee any long term recovery at this time. But, who knows.
What I do know is that I have gained a lot of faith in fundamental analysis during this experience. I wish I had better information sources for doing it. The primary such source seems to be the 10K filings of individual firms. Unfortunately, I do not have the time to devote to such a quest. These are, however, enlightening sources. Fundamentals do matter. More importantly, in the longer run, they will certainly win out.
So, for now we remain wedged between the new era potentials and recessionary overcapacities. We will see which one wins. Right now the latter has the upper hand.
Best of luck to you. |
