Expect More Stock and Financial Markets Tension, But Don't Panic!
Stock-Markets / Financial Markets Aug 18, 2007 - 02:16 AM
LONDON : “Economists said yesterday that turmoil on global stock markets was likely to persist but ruled out a catastrophic crash in share prices that would hit consumers and their pension funds.” This missive came from London by way of Saudi Arabia .
The Asian Times headline reads, “ Panic Attack: Asian markets take a tumble .” Who do you believe? The “don't panic” people or the “panic attack” crowd? Thursday, the Dow Jones Industrials dropped 340 points by mid-day, then rallied to close down only 15 points. Not a bad rescue, eh? Even with the final hour rescue, the Dow is still down nearly 3% this week.
So, will this decline be like 1929, 1987 or something else? In other words, is there reason to panic? So far, we have a .88 correlation to the 1987 crash and a .67 correlation to the 1929 crash. If we follow the route taken by the Dow in 1987, we may see the Dow Jones Industrials at 8941 by mid-September. The 1929 parallel would take us to 7297 by September 26 th . It just happens that an important cycle low is expected in the third week of September, so we may split the difference. In either event, my friend, George Ure of www.urbansurvival.com has laid out the above parameters of what may happen in the next 30 days or so. Then again, the Dow can do anything it pleases.
Buyer beware.
THE COMMENTS ABOVE CANNOT BE CONSTRUED AS TRADING ADVICE. Please seek the help of a competent investment professional before investing any of your hard-earned funds in the stock market.
Here's the reason for panic in Asia .
The Dow is down nearly 3% this week. Compare this with the Nikkei, which is down nearly 12% as of Thursday. Those who invested in the Nikkei a year ago and forgot to watch their basket of stocks are now empty-handed. Last night, the Nikkei was down another 874.69 points, which is beginning to approach the commonly used benchmark for a bear market, a loss of 20% or more.
The Shanghai index is stalled at the trendline…
…and the sideways movement in their market is actually a bearish omen. The reason is the up-trend has been broken, leaving the door open for a severe fall. One observation that I can make is, the steeper the up-trend, the harder the fall.
Ben Bernanke pushed the panic button…
…and the market rallied this morning in knee-jerk fashion. However, the case for lower prices is still very strong. The rally would have to rise above 1500 in order to re-establish a positive trend.
Instead, the S&P 500 rallied to 1450 and stalled. That is an impressive move from yesterday's low, but a decline from here may be even more impressive. I don't expect the market to decline much yet today, since it is the end of the week and there is some necessity to keep things positive at the start of the weekend. After all, the Fed must try to keep up the impression that it has the power to influence the markets. Monday will be very telling, since the Asian markets didn't have the benefit of a central bank intervention.
Bonds are retesting the high…
…but are being held back by what is referred to as trendline resistance. Often the indexes will re-test an area, because investors remember the market being there before. But reality sets in as buying power fades with each successive attempt. There is a high probability that this rally may fail. What may follow is a retest of the prior lows…
Home construction down in July…
…which pulled the housing index to a new three-year low. The building boom is now a bust , with new home construction at a 10-year low.
“Analysts said the housing problems are worsening because of rising mortgage defaults, especially in the market for subprime loans. That is dumping more homes on an already glutted market and causing banks to tighten up on lending standards, making it harder for prospective buyers to qualify for new mortgages.”
Did China 's threat backfire?
Hmmm. I wonder how the dollar rallied so nicely when the Bank of China threatened to sell their currency reserves? Could it be a buyer stepped in just to make sure that wouldn't happen? Or were the sellers just too tired to sell anymore?
Gold investors took a beating earlier this week…
…and the glass ceiling held. Last week I commented that, “…another trip below 660 could be devastating for the bulls.” Technically, any strength in the recent rally is now gone. Any rally attempts from here may likely be met with stiff resistance or selling pressure. My model suggests that a decline will ultimately be the path of least resistance. Liquidity matters here, too.
Finally! Relief at the pump.
The EIA's report on Wednesday suggests that gasoline prices may have a brief spike before settling down again. Refinery capacity is not an issue now, so supply bottlenecks and Gulf Coast hurricanes may be the only news that affect prices. The charts say that after this brief spike, wholesale gasoline prices may decline to $1.70 per gallon. That translates to below $2.50 at the pump.
A hurricane headed for our Gulf Coast did it.
The hurricane threatening the Gulf Coast is threatening to create a supply bottleneck, says the Energy Information Agency . But the fundamental rules of supply and demand suggest lower prices once this crisis passes. We are in a two-month window for possible future hurricanes, but the chart suggests that if we weather this one, the effect of the next one may be milder.
Back on the air again.
Tim Wood of www.cyclesman.com , John Grant and I have had a running commentary on the markets again this week. You may listen to our comments by clicking here .
An Excerpt from “Only Yesterday – An informal History of the 1920”s”
By Frederick Lewis Allen
“By every rule of logic the situation had now become more perilous than ever. If inflation had been serious in 1927, it was far more serious in 1929, as the total of brokers' loans climbed toward six billion (it had been only three and a half billion at the end of 1927). If the price level had been extravagant in 1927 it was preposterous now; and in economics, as in physics, there is no gainsaying the ancient principle that the higher they go, the harder they fall. But the speculative memory is short. As people in the summer of 1929 looked back for precedents, they were comforted by the recollection that every crash of the past few years had been followed by a recovery, and that every recovery had ultimately brought prices to a new high point . Two steps up, one step down, two steps up again-that was how the market went. If you sold, you had only to wait for the next crash (they came every few months) and buy in again. And there was really no reason to sell at all: you were bound to win in the end if your stock was sound. The really wise man, it appeared, was he who "bought and held on."
Time and again the economists and forecasters had cried, "Wolf, wolf," and the wolf had made only the most fleeting of visits. Time and again the Reserve Board had expressed fear of inflation, and inflation had failed to bring hard times. Business in danger? Why, nonsense!”
Note: My abbreviated commentary is due to our internet connection being down most of Friday. Information contained in this newsletter is as of Thursday's market close, unless noted otherwise.
Please make an appointment to discuss our investment strategies by calling Claire or Tony at (517) 699-1554, ext 10 or 11. Or e-mail us at tpi@thepracticalinvestor.com .
Regards,
Anthony M. Cherniawski,
President and CIO
http://www.thepracticalinvestor.com
As a State Registered Investment Advisor, The Practical Investor (TPI) manages private client investment portfolios using a proprietary investment strategy created by Chief Investment Officer Tony Cherniawski. Throughout 2000-01, when many investors felt the pain of double digit market losses, TPI successfully navigated the choppy investment waters, creating a profit for our private investment clients. With a focus on preserving assets and capitalizing on opportunities, TPI clients benefited greatly from the TPI strategies, allowing them to stay on track with their life goals
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