Marc Faber Kolumne - What are Financial Markets telling us? (E)

verfasst von Cosa, 07.09.2002, 10:49

-->Hallo,

dies ist zwar nicht der Abonnententext von Marc Faber, aber trotzdem lesenswert....

<font size="5">What are Financial Markets telling us?</font>

<font size="4">Could the Dow Jones slump to 4,000 or even 2,500, or worst case 777? One of the world's most accurate forecasters explains why this is possible, although dollar depreciation should cushion the fall.</font>


I was recently in one of these expensive Zürich taxis and asked the driver how business was. According to him his income had dropped by about 25% compared to a year ago.

A few days later, I was in Chicago and had a drink in a restaurant while waiting for a friend. En passant, I asked the barman how business was. He replied that it was very quite and down compared to a year ago. Then on the way back to Chiangmai, where for the last few weeks I have been very busy writing, I stopped in Hong Kong for a few days.
As I came out of the hotel, a taxi was waiting on the curb and on the way to the city airport train terminal the driver tried to convince me to take me to the airport instead. Now, normally the fare from Hong Kong to the airport with all the tunnel and highway charges comes up to around $47, but this driver was prepared to charge me only $ 26.
As always, I also spent some time at Hong Kong?s night entertainment spots. I have been doing this fairly regularly for the last 29 years I have stayed in Hong Kong, so I have at least some insights into its nightlife. I have never seen Hong Kong's bars so empty. At several place, which up to recently had never offered special prices during the early happy hours prices had been cut by 40%.

I am mentioning this because if you listen to government officials and the majority of economists, the economy is growing and the risks of a double dip recession are believed to be minor. But, when you talk to ordinary people, most of them will tell you that business is sluggish or down. In the case of the US, it seems that the strength of the economy is largely based on the housing and the automobile industry, which in turn owe their vibrancy to extremely rapid consumer and mortgage credit growth.

In the summer of 2000, shortly after the Nasdaq had peaked out, I turned very negative about the outlook for corporate profits, principally based on the poor performance of so many stocks, which by then - even on strong earnings' reports and despite the persistently bullish mumblings by analysts - failed to move up.

In other words, in the spring of 2000, stocks began to decline in anticipation of the corporate profit squeeze that followed in 2001 and so far this year, while the investment community was sleeping the slumber of confidence and self-delusion. I have to admit that I have some reservations about technical analysis, but in general I agree with Joe Granville (the world's most famous technician and market timer in the 1970s) who in his excellent book, 'Granville's New Strategy of Daily Stock Market Timing for Maximum Profit' wrote that, 'news is of little or no value in playing the market game successfully. News is generally for suckers. It misleads more often than it guides.'

Granville added that while news was not important, it was the way the market reacted to the news that is important. If the news is bad and the market acts well in the face of it, that is a bullish reaction and, therefore if one is looking for market guidance one can only get it from the market itself and not the news.

Therefore, I pay a lot of attention to how the market or a stock reacts to specific corporate, economic or political news. If the news about an industry is very good and stocks no longer rise, but decline, then I regard this as an important warning signal. Or if the government and its lackeys continue to make optimistic statements about the economy - such as is now the case and was the case in the 1929? 1932 and 1973-1974 bear markets - while the market declines I also get nervous about the state of the economy.

Conversely, when all the magazines are filled with negative comments about gold, as happened a year ago and gold shares start to move up, I become intrigued by such market action. Similarly, I like to ideally purchase shares or commodities, which have built a solid multi year base and then break out with heavy volume on the upside.

When, however, shares break down from a major top formation, while the reported news is still favorable, I always wonder what might be wrong with such a stock or market. I think it is for investors important to realize that news and earnings reports can be badly manipulated. The market action, however, can at very best only be manipulated for very short periods of time. Moreover, I have found that in most cases when stocks declined amidst favorable news, some disappointments followed within six to nine months.

Also, when I compare the signals the markets or individual stocks are giving to the recommendations of fundamental analysts, I also tend to lean towards Granville's view that 'if one is looking for market guidance' then the best guide is the market itself dictated by its technical action and not the buy and hold recommendations of analysts. So, what is technical analysis telling us about the long term outlook for the US Stock Market?

First of all it is important to realize that the 48 months moving average of the S&P 500 turned up in 1978 and although the stock market fell in 1981/1982, crashed in 1987, and went through a short bear phase in 1990, the 48 months moving average continued to rise. But something changed in 2001 and 2002, as the 48 months moving average began to first flatten out and then turned down.

Therefore, unless the market can rally in the near future to above 1250, this long term trend indicator will remain in a downtrend for the foreseeable future, indicating clearly that the stock market direction has changed. This is meaningful, because as I just mentioned, it is the first time in 25 years that this trend indicator has turned down.

Then if you look at the way the market has performed since 1997, you will note a gigantic long-term 'Head and Shoulders' formation for the S&P 500. The left head was completed with the September/ October 1998 decline. The head reached a high for the S&P 500 in March 2000 at 1553 and the right shoulder was formed by the rebound after September 2001, which lasted until early this year.

Head and Shoulders formations are considered as the most reliable reversal formations. According to the technician John Magee, 'the greater the reversal area - the wider the price fluctuations within it, the longer it takes to build, the more shares transferred during its construction - the more important its implication.

Thus, roughly speaking, a big reversal in a formation suggests a big move to follow and a small pattern, a small move (Robert Edwards and John Magee, 'Technical Analysis of Stock Trends', Boston 1948). The Head and Shoulders is not entirely complete, and an important reversal is not conclusively signalized until the neckline has been penetrated down-side by a decisive margin. According to Magee, 'the odds are so overwhelmingly in favor of the down trend's continuing, once a Head and Shoulders has been confirmed, that it pays to believe the evidence of the chart no matter how much it may appear to be out of accord with the prevailing news or market psychology'.

Now, if you look at a long-term chart of the S&P 500 you can see that the neckline, which runs at around 932 (the 1998 low) has been penetrated decisively downside when the S&P 500 fell in July to 774. In addition, the recent July/August rally was sharp, but disappointing in terms of volume, which diminished as prices rose.

Therefore, based purely on the technical reversal indicator of the Head and Shoulder top, which the S&P 500 has traced out between 1997 and today, investors ought to be very cautious. This particularly, if we consider the measuring implications of the Head and Shoulders, as measured by the number of points down vertically from the top of the head to the neckline.

Then one measures the same distance down from the neckline at the point where prices finally penetrated it following the completion of the right shoulder. The price level thus marked is the minimum probable objective of the decline. So if we take the neckline at around 930 and the top of the Head and Shoulders formation of the S&P 500 at 1553 (in early 2000), the distance from the top to the neckline amounts to 623 points. Then deduct 623 points from 930 and the minimum probable price objective of the 1997 to 2002 Head and Shoulders formation is for the S&P 500 just a tad above 300!

Now, I am sure that investors will argue that the S& P 500 cannot drop as low as 300, and also I have myself doubts that the market will decline to such an extend. Still, the following ought to be considered. The average bear market in the 20th century has given back from its high 20.5 quarters of previous gains. In other words the average bear market in the last century erased a little more than 5 years of previous gains.

Therefore, if the present bear market is an average bear market, the indices will decline to around their 1995 level, that is in the case of the S&P 500 to approximately 450. The problem, however, is that this bear market is not shaping up as an 'average bear market'. First of all, we must understand that the 1982 to 2000 bull market was not the average bull market, but the longest bull market in the history of the US, which led to the highest valuations ever.

At its peak the Nasdaq sold for 180 times its earnings and while the market has declined, the P/Es have remained stubbornly high because the earnings have collapsed. Therefore, given the longevity of the advance, the in scale unprecedented mania we experienced in 1999/2000, the still high valuations, and debt explosion and the imbalances the US became accustomed to in the 1990s, something more than the average bear market should be expected.

Following the 1929 peak, when valuations were far lower and the debt situation far healthier, the market gave back 15.5 years of previous gains. The bear market, which began in 1942, gave back 7.5 years of previous gains. The brief 1970 bear market and the sharp 1973/74 bear markets gave back respectively 7 and 8 years of previous gains.

Thus one could expect this bear market to give back a very minimum of the average bear market - that is decline to the 1995 level (S&P around 450) - but far more likely to give back previous gains going back to around 1990 (10 years), which would take down the index to about 300. (The corresponding level for the Dow Jones would be around 4000 in 1995 and around 2500 in 1990, and for the Nasdaq about 800 in 1995 and about 350 in 1990!)

Now this is not a forecast engraved in stone and, as I have pointed out in previous comments, the decline could be cushioned by a sharp depreciation of the US dollar. However, currency or inflation adjusted, this is the magnitude of the decline investors should expect based on technical analysis and based on the fact that this bear market is most unlikely to be just the average bear market in terms of years of previous capital gains that it will erase. I may add that in the case of Japan the Nikkei has retreated to the 1984 level and that - following the 1997 crisis - the Asian markets fell to around the 1985 level.

So far the Nikkei has only given back six years of previous gains leading to the late 1989 high, while the Asian markets gave back approximately 12 years of gains. But, don't get overly cheerful about the fact that the Nikkei only gave back six years of gains leading to the peak. This is 12 years after the market made its milestone high and amidst a far worse financial situation in Japan than in 1990 due to the continuous high fiscal deficit Japan has been and is still running, which has ensured the survival of the weakest!

There is one more point I would like to make and credit goes to my friend Robert Prechter, the author of the recent bestseller 'Conquering the Crash' (www.elliottwave.com). Prechter notes that, '...a mania is always followed by a collapse so severe that it brings values to below where they were when the mania began. On that basis, the Dow, should fall to below 777, the August 1982 low.

Incidentally, a few years ago, Jeremy Grantham one of the legends of the investment business also observed and produced a series of charts, which showed that, 'every extraordinary capital market gain has retreated 100% - or more'. The question is, therefore, when the mania began and that is again a matter of interpretation.

In my opinion, the real mania began sometime between the mid 1980s, which then led to the 1987 crash and the mid 1990s, when speculative stocks like Presstek, Iomega, Diana, and so on went into the stratosphere. Therefore, both based on technical factors and historical precedents such as the fact that the average bear market has given back 5 years of previous capital gains, further downside for the major averages ought to be expected - at least to the 1995 level and possibly down to the 1990 level, or even lower if Prechter has correctly interpreted the Wave Principle (according to him the Dow will decline from quintuple digits to triple digits - that is below 1000).

ein sonniges Wochenende wünscht
Cosa

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• Marc Faber Kolumne - What are Financial Markets telling us? (E) - Cosa, 07.09.2002, 10:49