Rudi's View | Oct 30 2008
This story was first published two days ago in the form of an email sent to registered FNArena readers.
By Rudi Filapek-Vandyck, editor FNArena
US trader and market commentator Dennis Gartman has some bad news for investors with a longer term horizon: market volatility is here to stay. Gone are the days that one could buy a stock and see it gradually appreciate as time went by. This is a time of two big leaps forward, three down and two big leaps forward again.
Last week Gartman predicted the current period of increased volatility would remain in place for a long time, possibly for the next few years, though not necessarily at the extreme levels we’ve seen since August. As such, suggests Gartman, the traditional buy-and-hold investment approach might as well be declared dead for the time being. This is a traders market and investors should act accordingly.
Gartman’s assessment comes after what can easily be described as probably the most extreme and volatile two month period in global financial history. At least once a day an old hand equity trader or stockbroker is quoted somewhere by saying he has never ever experienced anything similar in his multi-decade-long carreer.
Gartman’s assessment also comes at a time when financial experts and chartists are starting to predict global share markets are near their bottom. A rally should commence soon. And when it starts it will be fierce, violent and strong.
Acclaimed trader and chartist Joe DiNapoli, however, is not so sure whether such widely anticipated global share market rally will actually take place. Just like everyone else in the market, he would welcome such a rally, but chances are, unfortunately, that the world will have to sit on its hunger for a while longer. The problem, says DiNapoli, is that recent weakness has not so much to do with investors turning increasingly bearish on future prospects for companies and economies, but everything with forced selling.
The world has received a margin call, he exclaims when I interview him on Thursday, one day before the Trading and Investment Expo in Sydney where he will feature in a few seminars about Fibonacci trading techniques and insights. Under normal circumstances he too would be inclined to expect a strong rally following the carnage we’ve seen over the past two months. This time around, however, no-one has even the slightest clue how much deleveraging and forced selling still lies ahead of us. This, says DiNapoli, is by far the single largest uncertainty currently casting a shadow over global financial markets.
28 years ago DiNapoli locked himself up in a former sound studio, with no windows and only the company of a few pc’s, data and trading software plus a telephone. He spent five years developing what is now known as D-levels (from DiNapoli). These D-levels are today not only being used by traders worldwide but they have become de facto industry standards for students of advanced Fibonacci trading techniques. These days investors can buy trading software packages with DiNapoli Preferred Stochastic and DiNapoli MACD as built-in trend-defining tools. As proof of the quality of his work back then, DiNapoli says he hasn’t changed a thing to his trading systems since 1986.
What is DiNapoli’s view regarding the outlook for the US share market? It’s negative. On October 10 the Dow fell as low as 7,773.71 during that day’s trading session. The index ultimately closed at 8,451.19 on the day but it was the fact that a fall of 1000 points happened so easily, taking the index to its key long term support region, that has indicated the US share market remains in a weak and vulnerable condition. His gutfeel tells him the market will be back to re-test that 7700 level. He thinks it won’t stop the sellers a second time around. If correct, this would lower the focus to the 5500 level, by anyone’s account still a long way off from current levels (which are a long way off from levels seen only three months ago).
How certain is he about this view? DiNapoli explains that for the market’s primary target to switch from 7700 to 5500 several conditions need to be met. One of these conditions is that the index will have to revisit the 7700 region, and sink through it.
The best thing to happen, explains DiNapoli, is not a 2000 points or so rally everyone seems to be expecting. Such a rally would merely confirm what many fellow chartists predict will be the trading pattern for the months ahead: first a rally of 1-2 months and then the share market will start trending lower again and revisit the above mentioned support region.
The best scenario, explains DiNapoli, is for the share market to largely trade sideways for 3-4 months. This would indicate a bottom has fallen into place. This way the danger of switching to a new target at 5500 would greatly diminish.
However, his gutfeel favours the scenario of a strong rally, or at least the attempt for a strong rally. Whether this attempt will be successful hinges to a large extent on the great unknown these days: how much deleveraging plus forced selling still has to be squeezed out of the system?
Never mind the economic outlook, says DiNapoli, the market can deal with mass lay-offs, falling profits and declining stock valuations. What it cannot deal with is a shock to the financial system as severe as the one we’ve experienced over the year past. This, says DiNapoli, should not be underestimated and explains the relentless selling over the past two months.
So how confident is he in his prediction that the US share market, and thus by default all major equity markets across the globe, will revisit this month’s low at some point in the not too distant future? The main thing that bothers him, DiNapoli acknowledges, is that his view usually differs from what the majority in the market is thinking. As he is a firm believer the majority is more often wrong than correct, DiNapoli usually finds himself in a comfortable position (he went short oil when the world was positioned for US$150-plus prices).
This time around, however, he has the impression his view falls in line with what the majority is thinking. This, he explains, is the main reason he has some doubt about what the future might bring.