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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: fedhead who wrote (15424)	12/20/2002 12:10:41 AM
From: stockman_scott	Respond to of 57684

Forecast 2003 By: David Chapman, Union Securities TECHNICAL SCOOP Charts and technical commentary byDavid Chapman of Union Securities Ltd. 69 Yonge Street, Suite 800, Toronto, Ontario, M5E 1K3 (416) 604-0533, (416) 604- 0557 (fax) 1-888-298-7405 (toll free) email david@davidchapman.com www.davidchapman.com Forecast 2003 As we head into year-end a few themes are emerging that should carry us into 2003. War, rising commodity prices (particularly gold and oil) and a falling US$ are the three main areas that are catching our attention. If these three themes continue to dominate through 2003 then the stock markets could find themselves in the horrifying position of four years in a row down. Not even the Great Depression of the 1930’s accomplished that as the market saw us down for three hard years 1929-1932 then 1933 saw a strong rally following a first quarter low. Nor did the great Nikkei Dow bear market of the 1990’s have four consecutive down years. The Nikkei was down from 1990- 1992 then managed to have a strong 1993. Odd that we should mention those themes as we go into 2003 because in looking back on last year’s forecast we also emphasized golds, metals, oil & gas and the US$. None of them disappointed us as golds enjoyed an excellent first half and following a downward consolidation they are emerging from their six month rest and are rallying strong into the New Year. Golds should do well once again in 2003. Oils and the metals did not enjoy quite the same strength as gold did throughout 2002 but by year’s end they were also emerging as strong themes. Other interesting notes from our 2002 forecast expected that the Dow Jones Industrials would go as low as 5500 (actual – 7177), S&P 500 to 700 (actual – 768), NASDAQ 900 (actual – 1108) and the TSX Composite to 5400 (actual – 5812). Okay so at least we got the direction right. But those numbers were not unrealistic if the Fed had not once again to come to the rescue in October and save the day. Actual our forecast was short on average by 17% with our closest predictions bein g the S&P 500 and the TSX Composite. We were furthest off on the DJI. I would hate to think that we can get four years down but with those themes once again dominating as we go into 2003 we confess that it does not look good. And if commodities are rising, and the US$ is falling and the war drums continue to beat then bonds will not do well either. All of these themes are of course closely related to the possibility of war. War in the Mid-East still seems to be a strong possibility especially between the US and Iraq. A secondary one is the possibility of a second front in the Palestine/Israel conflict between Israel and Hezbollah. The Bush administration still appears to be committed to war against Iraq. If this is to be accomplished then it must get under way in the next month if they are to avoid a prolonged conflict into the heat of the summer starting in May. Also having the conflict completed in 2003 would suit Bush’s chances for reelection in 2004. Of course the bulls best hopes lie in no conflict at all and an easing of pressure that would lower commodity prices and gold and oil and result in a strong stock market rally as we proceed through 2003. One of the charts we showed last year was the 1962 (40 year) cycle. This chart turned into one of our best predictors for the year. The 1962 cycle saw the market make a top in the first quarter 1962 then off the cliff into July followed by a strong August rally then a secondary low in October. So with the 1962 cycle being so successful last year will lightning strike twice and 1963 provide the basis for 2003? We don’t think so because absent from that mix was the themes of war, rising commodities (gold and oil) and a falling US$. For those three themes we turn to the 1973 cycle. That was the period of Vietnam (even though it was ending), a mid-east oil embargo, and conflicts between the Arabs and Israelis and rising gold prices. What was interesting is that period was at the heart of the Kondratieff summer that has themes of risingcommodity prices, falling stock markets and rising bond yields. Isn’t the Kondratieff winter supposed to be about falling or at least steady commodity prices? Well yes it is but that doesn’t mean we don’t or can’t have a period where it dominates and causes the markets particula rly the stock market, bond prices and the US$ grief. And this may be one of those periods. As our chart of the 1973 cycle (30 years) shows we can not help but be struck by the rally out of October lows in 1972 peaking in early January then off the cliff for a good part of the year. This is a bull’s worst nightmare so if you are a bull then look at it closely as you may be seeing the highs for the year as we go into 2003. Another year that also was a bear market was 1953 (50 years). But 1953 was a corrective year within the context of a bull market. Still it was period that saw rising commodity prices and a continuation of the Korean War. But for years ending in 3 the theme is often an up bull year and this remains the great hope for the bulls in 2003. That was the case not only in 1963 (40 years) but also 1933 (70 years), 1943 (60 years), 1983 (20 years) and 1993 (10 years). While war was raging in 1943 the other years were characterized by falling commodity prices and falling interest rates so those were ideal periods for stocks. Another important cycle is the 25-year cycle (1978) and this too proved to be generally positive year. 1978 is interesting as it also had a year end rally followed by a hard down first quarter then a strong rally into October/November before once again going off the cliff. This one bears watching. Besides 1953 and 1973 as bear years the 100-year, 1903 and 80 year, 1923 were also down years. One other, the 90-year cycle (1913) saw the stock market roil in the first half and rally in the second but generally it was shallow moves. The 1903 cycle should be watched closely as that year saw a financial panic as debt defaults; bankruptcies and rising interest rates were themes. That year the market managed to rally into the first quarter then it was off the cliff. 1923 (80 years) was a corrective year within the context of the great bull market of the "Roaring 20’s". But it is interesting as it also made a pivot in December then it was up into the first quarter before going almost straight down the balance of the year. We should be reminded that even though we have already seen some spectacular bankruptcies in Enron, World Com, UAL and others there could be more to come. And one shouldn’t forget the ongoing rumours of significant problems in the banking sector particularly at J.P. Morgan Chase and Citigroup. Debt default and bankruptcies is one of the major themes of the Kondratieff winter and we have often pointed out that the overburdened consumer and corporations are debt accidents waiting to happen. Worse after years of getting their fiscal house in order the US has returned to deficits. Stocks still remain overvalued by most measurements of valuation. With that in mind it is almost impossible to get any sustained rally going unless we are first able to do it from much lower levels. We are still looking for our four-year cycle low although many believe it came with the lows seen in July and October this year. But a massive head & shoulders seen on the S&P 500 and as well on the TSX composite suggest much lower prices. But since we are late in the four-year cycle if the October lows are not the ones then we should see it no later then the first quarter or so. For that reason the 1978 cycle (25 years) intrigues us the most with the significant low in the first quarter. Targets could be Dow Jones Industrials down to 5500, the S&P 500 falling to 600; NASDAQ to 700 but 900 may be more possible and the TSX Composite to 5400. If the October lows are good then we will at worst see a severe test of those lows in the first quarter or small new lows. Conversely oil, gold would top in the first half of the year and the US$ would bottom. These would not of course be the final tops or bottoms in any of these cases. We suspect that will still be to come but further out in the decade. If the market is to rally after the first quarter it is important that the much talked about war between the US and Iraq not happen. In that way the themes going into 2003 of rising oil and gold prices and firm commodity prices and a falling US$ would ease (and provide support for bonds that will fall in price rise in yield if commodity prices are rising and the US$ falling). Certainly the cycles overall do seem to favour a more positive year in 2003 but clearly we need to push war talk into the background. If we can’t and war does start and it doesn’t end quickly then all bets are off and we could, incredible as it seems, see a fourth consecutive down year. The market would shudder. The Kondratieff winter is not a period that is kind to investors. We will update our forecast as the year progresses. For Charts, click on link goldseek.com