FYI | Mar 02 2009
(This story was originally published on Wednesday February 25th. It has now been republished to make it accessible to non-paying members at FNArena and readers elsewhere.)
Earlier this month, market strategists at BCA Research reported their in-house forward looking indicators were signalling that US equities would be at a higher level in twelve months. While this, no doubt, will offer some comfort to those investors who depend on share market strength to grow their nest eggs, BCA strategists were quick to admit this doesn’t necessarily say anything about what might happen between now and February 2010.
And, of course, it doesn’t.
Three weeks ago the Dow Jones Industrial Average (to name the most used iconic symbol for the US market) was oscillating around the 8000 level, seemingly unable to make up its mind, but displaying good spirits nevertheless. In Australia, the All Ordinaries and S&P/ASX200 index were pretty much doing the same thing, with the first one happily bouncing between 3300-3400 and the second one moving up and down just under the 3500 level.
What I like about BCA Research, apart from their long standing, ultra-solid reputation, is the fact they don’t have to be salesmen. Their research is sold to politicians, big corporates and professional investors worldwide. These customers don’t pay thousands of dollars each year to receive some sugar-coated fairytale stories about how, maybe, the world’s problems might all come to an end with the stroke of a Presidential pen. This is the kind of audience that is ruthless and highly demanding. And BCA Research has a long standing position as supplier of future projections and factual market analyses.
What I don’t like about the projection BCA strategists made is they didn’t disclose whether anything that can happen between now and February next year can still impact on their projections. Apart from a Black Swan, of course.
Even if we assume that in twelve months’ time BCA’s forward looking indicators will be proven correct, this still leaves the door open to a plethora of possibilities for what can and might happen to equity markets in the shorter term. As we all know by now, major indices in Japan, the US, the UK, Germany, France and others have all fallen through technical support levels these past few days. This would suggest we are yet again waiting for the elevator to arrive in order to take us a few floors further down.
600 or 650 are popular numbers cited for the S&P500 index in the US. This becomes 6000 when we’re talking Dow. In Australia, the next technical support is believed to be around 2700 for both the All Ordinaries and the S&P/ASX200. All this must sound pretty scary, as these numbers imply equities have yet another 16-19% to lose in this bear market; 22.5% if we place the target at 600 for the S&P500.
Yet, not everybody is convinced the only way is down from here. Some market forecasters, like David Hunt, believe investors should prepare for a major move upwards. Hunt, who is associated with the not-for-profit Australian Professional Technical Analysts Association, has been enjoying positive reviews of his market analysis since he successfully predicted the market top in November 2007. In December last year he predicted markets were likely to turn downwards from around February 12 – they did so on February 13 (he missed it by one day). So what does he think comes next?
A big rally.
I contacted Hunt this morning and he was friendly enough to provide me with some insights into his projections for the medium term. The market is about to turn, he told me, 3600 should be considered a “given”. But he thinks much more is possible: 4300 by May, and if things really fall into the right places we should see the S&P200 at 5000 by September.
That would be equal to a gain of 50% in seven months.
I have to add to all this that Hunt seemed a bit of an odd character, not at all reaching out for recognition or publicity of any sorts. The vibes I picked up during our telephone conversation were pretty lacklustre and when I thanked him for the information and told him I was thinking about using it in this story, he responded with: “I won’t read it. I don’t care.”
What makes his predictions interesting is that others have similar views, like ABN Amro Morgans’ David Goulding, who has been predicting what he calls “The Great Sucker Rally of 2008-09” for a while now. Goulding thinks you should all become fully invested in the share market right now as this big rally is about to take off.
Goulding is even more ambitious than Hunt, placing the target at a minimum at 5034 by August, and potentially as high as 5462 by then. The latter is calculated as a Fibonacci 61.8% retracement of the share market losses from the all-time high in November 2007. The former is a Gann 50% retracement from the same peak.
Goulding has a very bearish view on the longer term outlook for global equities, believing that once the next rally has petered out, a new downtrend will kick in that will pull equity valuations to much lower levels than where they are today. (He believes a final bottom for the S&P200 in the vicinity of 2693 is a minimum, not a maximum like many others do).
It is because of this long term view, and because of the steep gains that are projected to be made in the upcoming upswing, that Goulding likes to talk about a sucker’s rally. It is not difficult to anticipate what will likely happen, assuming his predictions come true: as share prices rise and rise, more and more investors will become enthusiastic about investing in the share market again, and their renewed enthusiasm will be fuelled by reports in financial media and by tip-sheets suggesting a new bull market might well have started.
Similar to other chartists, Goulding believes recent market developments have only added to his conviction: the low volumes on days of repeated weakness, the divergence between indices (Nasdaq is nowhere near its November lows while Dow and S&P500 closed at new decade lows), and the fact that although indices in Australia are flirting with new lows, the number of individual stocks that is currently trading at 52-week lows is small, certainly in comparison with November last year.
There’s a historical precedent too: during the 1987-88 crash, the All Ordinaries index fell to a low in November followed by a successful retest of these lows 91 days later in February. After that, a significant rally over 182 days unfolded. A repeat of this scenario suggests a top in August.
Goulding also believes investors should draw confidence from the fact the Nasdaq is performing better than the Dow and the S&P500 indices in the US. He argues the Nasdaq is the new leader and its outperformance is showing the way forward.
All this might make sense from a pure technical perspective, but those who have read my Weekly Analysis this week will have picked up that global economic forecasts are still in decline, and this will -whether we like it or not- translate into lower earnings for companies around the world. Merrill Lynch economist David A. Rosenberg also picked up on this matter this week, making the following prediction:
“As an aside, we have penned in [US]$46 for operating EPS for this year, so on our estimates the market is basically operating with a 16x multiple. Call us when we get down to a classic recession trough multiple of 12x – we are at [US]$54 for 2010E and at one point we will start to discount next year’s earnings stream – which, on our estimates, means the bottom will likely be in a 550-650 range.” (That’s for the S&P500 index, by the way).
I wouldn’t be surprised if in 18 months from today we look back at this story only to conclude that all of the above -even though contradictory at first sight- turned out correct.
With these thoughts I leave you all this week.
Till next week!
Your editor,
Rudi Filapek-Vandyck
(as always firmly supported by the Ab Fab team of Greg, Chris, Andrew, George, Grahame, Pat and Joyce)
As a P.S. this week I include one chart that I believe shows exactly where today’s global problems originate. (Apologies if you read this story via a third party distribution channel – the chart may not show. However, you can sign up for a free trial at: www.fnarena.com).
