Archive through April 06, 2008

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ody

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Saturday, April 05, 2008 - 07:25 am:

JUST WHAT POINT ARE WE AT????

It's not easy to pick just now, but as far as I can see the rally is in the process of stalling, or at least losing force, as people wonder whether or not they should anticipate a recovery several months down the track or prepare first for more bad news.

The bad job figures did, of course, have an impact on Wall Street last night:

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The unemployment rate, generated by a separate survey, shot up to 5.1% in the month from 4.8% in the previous month. Economists thought it would rise to just 5%. That 5.1% rate is a nearly three-year high.

The report was certainly "ugly," said David Doll, CEO at Kanaly Trust Management. "This would seem to be one of the final nails in the coffin about whether or not we're in a recession."

However, he said the stock reaction Friday was a good sign for those who think that the market has bottomed after months of selling and that investors are trying to anticipate a recovery 6 or 9 months out.

"It would appear that the market sentiment is starting to change, but the next month is still going to be dicey," Doll said. "Earnings are going to be terrible and we'll be looking at pretty bad first-quarter GDP number in about 4 weeks."
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My bet is that although the worst of the fear is probably over, there will now be a period during which the US market and others will cease going forward and digest the bad news coming in. The US has led sentiment upward, but there is no doubt that the job figures will re-establish some realism as distinct from the hazy dreaming ("no further write-downs and the Fed will see us through") that has followed the Bear-Stearns exercise.

In other words, the market is likely to have second thoughts and pause - likely enough for a time go backward - before it will REALLY go up after it has come to terms with such fear as remains. Colin's figures make quite plain that underneath the bravado that fear is still very big.

The job figures are one joker in the pack, but "terrible" earnings and the current GDP figure, as mentioned above, will also have an impact, and people will want to KNOW about some of these things before totally committing themselves to the idea of a recovery. The housing figures will almost certainly show an ongoing decline - just recently I read a persuasive US report (from within the industry) that said a recovery in that market will not occur until 1910, or at the very earliest 1909, with more price reductions to come. Unaffordable mortgages will still loom large, given the credit crunch, and the extent of overcommitment on the part of borrowers. The general decline in the economy will probably reveal itself in several more figures in the near future.

So I would think that during the next 1-2 months there will be a sense that the recovery is not going to be as easy, and is not as near, as the Bear-Stearns episode might suggest. For the market to feel it has a "plank", that episode will probably not be enough.

My best estimate is that we shall therefore still have at least one period of weakness in share markets, in the relatively near future: I do not think that the rally can go much higher without that (or, that if it does continue, will simply beget its opposite a bit later). April is often a good month, but ...

However, there now IS a sense of anticipation of a recovery, as well, and Captain Chaza is right to insist that the market anticipates the recovery in the economy, not the other way round. But the market has no magical power to GENERATE a recovery, and frequently, during a bear period, it makes a number of false starts, from which it first has to decline in order to reflect on what difficulties are still ahead, before it then takes off in the belief that a recovery is some 6-9 months away.

So, although the market DOES anticipate, that does not mean that we can see every move up as necessarily THE BIG LEAD for the future. My guess is that the market in recent weeks has been toying with a scenario of hope, but is still fragile enough to withdraw on the announcement of troubles which we still have to work through and confront.

Once the market feels that there are not too many unknowns left, it will be willing to "live with" bad things it still needs to go through while it can confidently move ahead. Hence my own anticipation is that those who at the beginning of the year said that this will probably be a year of two halves will prove roughly right. We might still even have a strong April (though the market to me looks like peaking just now) - but there will be enough bad news still to cause a pause/fall during the next two months or so, and THEN, I'd guess, the market will probably move up with some conviction.

hilarius

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Saturday, April 05, 2008 - 07:36 am:

Ody

I agree with your analysis and as I said above I am another who believes the market is a leading indicator

For all the reasons you have stated I will be watching the position of the next LOW with the greatest interest

If above the last low that will be encouraging

If below the last low all that you have said could transpire

So in my view the position of the next LOW is critical

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

rdumas

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Saturday, April 05, 2008 - 07:52 am:

Hi Hilarius,

As Warren Buffet has always said, the first priority is to avoid losing money. When you have that base covered then making money becomes an easier task. The article I posted yesterday was one which alerts us to possible threats to our future wealth and allows us to not step over a cliff in blissful ignorance.

Whilst I believe that there are many significant fundamental problems that have not been solved and lay in waiting for future resolution, we must none the less remain vigilant to all aspects of this mad market of ours. The fundamentals do not support the rally that is currently taking place but one thing that is certain, there has been a massive change in market sentiment. At times like this it is better to look at a weekly chart than a daily chart in order to filter out the noise.

Below is a 3 year chart of the ASX200 clearly highlighting the changing scene.

From a TA perspective the one thing that stands out is that the long standing descending trend line which started in November 2007 has finally been breached quite strongly. Whilst this could break down in future but at this stage at least the market action is quite bullish.

Market participants have no doubt accepted the fact that the US may be in recession but they no longer have the fear of possible catastrophes. Whilst in reality these still exist, the market has for the time being put them aside whilst they satisfy their insatiable need to invest their money in the market.

So there we have it......a case where the technicals are out of synch with the fundamentals. It is true that the secondary market is always a leading indicator of the primary market. It is equally true that it is a leading indicator because the secondary market attempts at all times to anticipate what the primary market will do in the future. As more information about the primary market comes to hand, the secondary market re-adjusts its thoughts about the future and responds accordingly. Hence the fact remains that if a snap shot is taken of the secondary market at any point in time, the direction of the secondary market does not reflect what the real economy will do in future but rather what it thinks it will do in the future. If information comes to hand that makes it aware that its earlier guess was incorrect, it is more than capable of 'turning on a sixpence' and reversing its earlier direction. This is a daily occurence and explains why the secondary market can have quite wild oscillations whilst the primary market slowly winds its way through its daily activities.

It is for the above reason that it depends on an investor's investment time frame that determines whether the market is the place to be at any point in time. This is a concept that remains totally beyond the grasp of the little boy that continues to insult people with his name calling antics. Unfortunately a small percentage of people never mature enough to take themselves out of the school boy bully phase of their lives.

rdumas

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Saturday, April 05, 2008 - 08:18 am:

Hi Ody,

It would appear that we once again were writing our thoughts at the same time. It won't surprise you to know that I agree with your analysis. The only thing that I would add is that I believe that we have already seen the absolute bottom in the materials and financial sectors. These bottoms were reached when the fear was greatest and many of the catastrophes had been priced into the sectors.

I would feel fairly confident to use the bottoms in these sectors as platforms or levels to calculate likely maximum loss scenarios. This does not mean that the overall market index can't fall below its previous low as we have seen from our market actions that there was a lot of sector rotation taking place during the worst of the down moves. Had both the financial and materials sectors moved down in unison, the market would have made a much deeper low.

If we then use this market rotation principle as a likely scenario then we have a fairly high probability that in fact our index did reach its likely bottom back in January. There is still no doubt a lot of bad news to come out about the real US economy in future but if it trickles out in future as it has in the past then in all likelihood the market should not fall any further than the January lows.

ody

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Saturday, April 05, 2008 - 09:42 am:

RUDY: ADDITIONAL EXPLANATION RE MARKET DIRECTION

Hi Rudy,

Yes, we obviously were both engaged in writing on similar issues at the same time. I value your longer and more expert analysis, particularly on the T/A aspects. As for the size of any fall that we may still get: I should have added (as I failed to do) that I too am quite confident that we have seen the absolute bottom in he financials and materials. Indeed, I'd feel fairly confident that even the market as a whole will probably not return to the level it reached on January 22nd.

My concern, however, is that at its present level sentiment of those participating will probably prove too optimistic to be sustained and upon reflection is likely to "morph" into something more diffident, so that it would seem premature to think that the market will merely go up from here. More likely, I feel, it will once again preoccupy itself with various negatives, which could then well lead to a decline from the present level. And when once THAT has occurred and people have come to grips with their remaining fears I would think that (probably some time out from now) more SOLID (and broadly based) confidence will emerge.

So while I don't expect a fall all the way back to the level of 22 January, I think the market still needs to persuade itself of being able to cope with more ("residual") bad news before it can really rise ongoingly. Which means, probably, that it needs to fall once again, even if not that far, before showing a level of relaxation and comfort that does not yet seem present. I'd anticipate this next phase to take any time up to three months, at a guess.

lafee

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Saturday, April 05, 2008 - 10:23 am:

Soros is more bearish than ever.

Listen to him talk about his new book here http://www.georgesoros.com/call040408

Cheers Lafee

Don't ask an academic if what he does is relevant

hilarius

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Saturday, April 05, 2008 - 10:53 am:

Lafee

Opinion seems equally divided between fast recovery and slow recovery

Who can a poor friar believe?

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

ken

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Saturday, April 05, 2008 - 11:10 am:

Ody,

1909,1910 - living in the past? (joke)

Rudy,

Could it be that the fundamentals of the Australian economy are asserting themselves - a market PE of 13ish is historically low with the current level of inflation.

If you consider the relevant fundamentals to be those of the US economy, are'nt you just expressing your own sentiment as fundamentals, and those even in the wrong timeframe for your trading?

You seem to be convinced that the market has a lot further to fall eventually, ie long term. I agree with you.

But you concede that you are not a long term trader/investor, but a medium term trader now. So as the market has risen for a longer period than any rise in the downtrend, why would you not see this as a medium term opportunity to trade? As a long term investor you can make your decisions using fundamental data. However this does not work very well for medium term trading so the technical signals should be used for trading even if not initially supported by the fundamentals.

No-one knows what the hidden US fundamentals are so the perceived fundamentals are expressed as sentiment. When the FED plugged the Bear Stearns hole it could be argued that the perceived fundamentals changed for the better and the market responded.

Regards,

Ken

(Message edited by ken on April 05, 2008)

ody

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Saturday, April 05, 2008 - 11:47 am:

KEN - MARKET TIMING ETC

Right: I still have difficulty adjusting to it being 2008 now (was born in 1939)!

But, to quote you in your post to Rudy:

"When the FED plugged the Bear Stearns hole it could be argued that the perceived fundamentals changed for the better and the market responded."

I'd say quite the contrary is true. The Fed did NOT tackle the fundamentals, and the market is wrong in thinking that any real improvement was effected (except in sentiment).

I think Soros is right in believing that we are living in uncommonly dangerous times. As he says, the availability of credit (especially since Reagan and Thatcher) together with largely UNregulated markets is at the heart of our ongoing problem. The best we can hope for is that we shall not see a problem of trillions exploding - a possibility he is right to draw attention to. But it is minimally the case that excessive credit has been playing up as a huge danger and destroyer of wealth every few years for quite some time now, and unless regulation occurs, risk therefore remains very serious.

The individual investor, of course, must decide how much risk to accept, and just what risks s/he thinks likely to eventuate.

My view for what it is worth is this:

Medium-term trading that is based on BOTH T/A and F/A cannot operate on the basis of unsatisfactory F/A and too short a T/A time to provide something like a reasonable assessment of just what is likely to happen even if one does not primarily think of Soros's trillions but more mundane developments. At the moment, one would go AGAINST F/A, and base one's actions on a T/A situation that even by itself does not provide a good enough basis to get set for some months - as distinct from perhaps days or weeks.

ken

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Saturday, April 05, 2008 - 12:08 pm:

Have a look at this chart, everyone, and let me know what you think.

My opinion is that we have just finished a large descending wedge in the All Ords. I am not so sure about the form of each leg being correct, but we could be in for a substantial unexpected rise.

sway

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Saturday, April 05, 2008 - 12:32 pm:

Rudy

I notice your charts normally include a 14day Wilder RSI. I have read the IC trading guide for RSI but am interested in your comments. Do you use this indicator, and if so how do you interpret it? Unfortunately the scale makes it hard to see any detail.

Thanks
Sway

hilarius

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Saturday, April 05, 2008 - 12:32 pm:

Ody

In support of your view, and that of Mr Soros, none less than the Fed Chairman, Mr Bernanke, said that the markets were within hours of a likely major meltdown when the Bear Stearns stabilisation (my term) was effected

I do not consider that it even approached a bail-out given that that the Bear Stears business was merged with another business on highly unfavourable terms to the Bear Stearns owners and executives compared to its preceding market valuation

Market Watch says that the Fed investigators worked through the night trying to find other solutions and they concluded that the cost to America and the world of not acting was greater than the cost of acting to merge (and I believe effectively dissolve) Bear Stearns

I consider they were right

Ody it supports your case that if we were that close to a total meltdown, we could easily come that close again if another iceberg (based on rumour or fact) is lurking below the surface as the Market Titanic sails on through the night

Ken

Your case is supported by the fact that the market has an uncanny knack of predicting the future, often months ahead, and anything up to a year ahead of fundamental upturns

Regardless of whether that is the case or not a relief rally of even short duration is tradable, depending on one's time frame

Yet as Ody has pointed out previous rallies have been short-lived and disappointment and disillusion have set in quickly. I hope this rally is different, but like Ody I am looking for evidence that it really is different. Like him I agree there has been a sentiment change ... and I see fundamentals and sentiment gradually converging

What is needed is a HIGHER LOW ... not a LOWER LOW

I understand that in the Great Depression there were SEVEN significant bear rallies, all followed by breath-taking losses in the following market plunges

We must now hope and can reasonably expect that the aggressive policies of the Fed to minimise recession and maximise recovery (contrasting with the disastrously restrictive credit policies in the Great Depression) can avoid catastophe, but some institutions are restricting credit faster than the Fed can loosen it, and maybe from their perspective they have good reason to do so

Recessions and depressions have certain beneficial and curative effects (hopefully purgative rather than amputative) in removing non-productive speculation and excess valuations from economies

I hope, Ken, that you can remain on the right side of whatever swings the market throws at you, and that you can help us read the signs correctly

After all the charts tell us everything we need to know!

So perhaps you can confirm for us the duration of the present market recovery, and whether the next LOW will be a HIGHER LOW or a LOWER LOW?

I hope it will be the former but if it is the LATTER the size of the fears which it ignites could cause even recent fears to pale in comparison

With Best Wishes

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

hilarius

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