New Year, New High Hopes for Stocks
You can probably relate: Every year, come January 1, I just can’t help but feel that “every little thing is gonna be all right,” as Bob Marley sang.
This year, the mainstream financial community is sharing the same sentiment. Here’s how EWI’s Steve Hochberg summarized it [emphasis added]:
At its conclusion, 2011 was marked by back-and-forth stock swings that resulted in essentially a flat market. My Bloomberg screen shows that the DJIA ended up 5.53% for the year, the S&P was flat…while the NASDAQ was down 1.80%. The broadest aggregate measure of stock market performance, the DJ Wilshire 5000, which includes nearly all stocks that trade, ended 2011 down 1%.
The Dow’s action masks a strongly negative stock market performance overseas. For instance, in U.S. dollar terms, the Euro Stoxx 50 Index was down nearly 20% in 2011, with the FTSE down almost 6%, the French CAC off almost 20% and the German DAX down over 17%. Asian markets were also hit hard. The S&P Asia 50 lost over 15%, the Nikkei declined 13%, the Hang Seng was off 20%, the Shanghai Composite ended 2011 down over 18%, while Australia was lower by 14%. All were down in euro terms, too.
But not to worry: a recent USA Today article notes that a “quick survey of New Year’s prognostications from investment strategists suggests stocks might deliver the double-digit gains that they have put up, on average, over the long term. A snapshot of 2012 year-end-price targets from five firms shows an average gain of 10.5% for stocks.”
Very optimistic, indeed!
Except, when have we heard that kind of talk before? Continue reading
Stock Market Is Not Physics: Part IV
The following series is excerpted from two classic issues of Robert Prechter’s Elliott Wave Theorist. Although originally published in 2004, the valuable series has been re-released in the Independent Investor eBook, along with over 100 pages of other reports that challenge conventional economic thinking.
Here is Part IV of the series. Click these links to read Part I, Part II, and Part III. Or you can download your free copy of the Independent Investor eBook here.
Another Example of Rationalization, Ripped from the Headlines Almost every day brings another example of rationalization in defense of the idea that news moves markets. The stock market rallied for half an hour on the morning of April 20, peaked at 10:00 a.m., and sold off for the rest of the day. Almost every newspaper and wire service claims that the market sold off because “Greenspan told Congress that the nation’s banking system is well prepared to deal with rising rates, which the market interpreted as a new signal the Fed will tighten its policy sooner rather than later.”3 Is this explanation plausible? Continue reading
Stock Market Is Not Physics Part III
The following series is excerpted from two classic issues of Robert Prechter’s Elliott Wave Theorist. Although originally published in 2004, the valuable series has been re-released in the Independent Investor eBook, along with over 100 pages of other reports that challenge conventional economic thinking.
Here is Part III of the series. You can read Part I and Part II here. Check back in a few days to read Part IV, or you can download your free copy of the Independent Investor eBook here.
Cause and Effect In the 1990s, a university professor sold many books that made a case for buying “stocks for the long run.” In a recent issue of USA Today, he told a reporter, “Clearly, the risk of terror is the major reason why the markets have come down. We can’t quantify these risks; it’s not like flipping a coin and knowing your odds are 50-50 that an attack won’t occur.”1
In other words, he accepts the physics paradigm of external cause and effect with respect to the stock market but says he cannot predict the cause part of the equation and therefore cannot predict stock prices. The first question is, well, if one cannot predict causes, then how can one write a book predicting effects, i.e., arguing that stocks will go up? Or down or sideways? A second question is far more important. We have already seen that economic performance, earnings and inflation do not necessarily coincide with movements in apparently related financial markets. In fact, the two sets of data can utterly oppose each other. Is there any evidence that dramatic news events that make headlines, such as terrorist attacks, political events, wars, crises or any such events are causal to stock market movement? Continue reading
The Stock Market Is Not Physics: Part I
The following series is excerpted from two classic issues of Robert Prechter’s Elliott Wave Theorist. Although originally published in 2004, the valuable series has been re-released in the Independent Investor eBook, along with over 100 pages of other reports that challenge conventional economic thinking.
Here is Part I of the series. Check back in a few days to read Part II, or you can download your free copy of the Independent Investor eBook here.
See if you can answer these four questions:
- In 1950, a good computer cost $1 million. In 1990, it cost $5000. Today it costs $1000. Question: What will a good computer cost 50 years from today?
- Democracy as a form of government has been spreading for centuries. In the 1940s, Japan changed from an empire to a democracy. In the 1980s, the Russian Soviet system collapsed, and now the country holds multi-party elections. In the 1990s, China adopted free-market reforms. In March of this year, Iraq, a former dictatorship, celebrated a new democratic constitution. Question: Fifty years from today, will a larger or smaller percentage of the world’s population live under democracy?
- In the decade from 1983 to 1993, there were ten months of recession in the U.S.; in the subsequent decade from 1993 to 2003, there were 8 months of recession. In the first period, expansion was underway 92 percent of the time; in the second period, it was 93 percent. Question: What percentage of the time will expansion take place during the decade from 2003 to 2013?
- In 1970, Reserve Funds kicked off the hugely successful money market fund industry. In 1973, the CBOE introduced options on stocks. In 1977, Michael Milken invented junk bond financing, which became a major category of investment. In 1982, stock index futures and options on futures began to trade. In 1983, options on stock indexes became available. Keogh plans, IRAs and 401k’s have brought tax breaks to the investing public. The mutual fund industry, a small segment of the financial world in the late 1970s, has attracted the public’s invested wealth to the point that there are more mutual funds than there are NYSE stocks. Futures contracts on individual stocks have just begun trading. Question: Over the next 50 years, will the number and sophistication of financial services increase or decrease?
Observe that I asked you a microeconomic question, a political question, a macroeconomic question and a financial question. Continue reading
European Union Agreement: Good or Bad for the Dow Industrials?
Did European Union leaders make the sovereign debt crisis “go away” last week?
Not even close. What they did agree on is tougher budget rules:
“…17 countries of the euro zone…agreed to run only minimal budget deficits in the future and allowed the European Court of Justice the right to strike down national laws that don’t enforce such discipline properly…”
Wall Street Journal, (12/9)
Will the EU agreement prove bullish or bearish for world stock markets, including the Dow Industrials?
Let’s put it this way: The evidence suggests that government intervention in the economy does not alter the dominant trend of financial markets.
For example: Look at the DJIA chart and try to identify when the U.S. government bailed out Fannie Mae, Freddie Mac, and other financial institutions. Continue reading
Did the Past 7 Weeks of Rally Lull You to Sleep?
Here’s why you SHOULDN’T get too comfortable
Bear markets are cunning beasts.
Don’t get me wrong — we are not in the bear market territory yet. At least, not officially.
An “official” bear market begins when the stocks indexes decline 20%. The DJIA’s decline from the May 2, 2011 high to the September 21 low is about 17%. Close, but no cigar.
Add to that the strong rallies we’ve seen over the past few weeks (Sept. 12-20: +685 points in the Dow, for example) — and lots of people conclude that despite the volatility, things aren’t so bad. Continue reading
A Rising Market Won’t Stop the “Economic Rot” Beneath
Are you prepared for when the “disconnect” between the market and economy reconnects?
Suppose you see a lovely house — one with great curb appeal. It has new paint and manicured shrubbery out front.
But also suppose that you look more closely. You press your thumb on the window sill and the wood frame crumbles in. Come to find out, the wood is rotten in too many places to count. The deck joists and supports are fractured. Even the terrain underneath the deck looks unstable. And the closer you look the worse the problems are.
It’s obvious that very few people would buy that house. Yet you can be pretty sure that the home’s owner will have “good things” to say about the place. Continue reading
DOW Seasonal Analysis
The attached table shows the performance of the Dow over the last 10 years by season.
Note that the summer months Q3 (July- September) are the worst performing months with 6 out of 10 years being down and only 2 out of 10 being up.
Q4 is historically the best performing months with 8 up years and no down years.
Q1 is more up than down and Q2 is about even with 3 down years and 4 up years.
| Quarter | Number of Down Years | Number of Flat Years | Number of Up Years |
| Q1 Jan-Mar | 2 | 4 | 4 |
| Q2 Apr- Jun | 3 | 3 | 4 |
| Q3 Jul-Sep | 6 | 2 | 2 |
| Q4 Oct-Dec | 0 | 2 | 8 |
Stock Market Corrections: 8 Steps For Market Survival
What do you think of when you hear the phrase stock market correction?
If the major media is to be believed, a stock market correction is akin to Armageddon. The sky is falling, etc, etc.
Truth be told, stock market geniuses like Billionaire Warren Buffett see corrections as a fabulous thing. It’s the flip side of a rally, nothing more, nothing less. In theory, corrections adjust equity prices to their actual value or “support levels”. In reality, it is much simpler than that. Prices fall when the market runs out of buyers. If you have cash you can pick up all kinds of bargains. Buffett hoarded his cash as the market got pricey because he said, he couldn’t find anything of value to purchase. In other words he knew the market was overpriced and so he hoarded his cash waiting for prices to come down… as he knew they would.
Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. Warren Buffett
Here’s a list of 8 things to do during a stock market correction.
Continue reading
Market Parallels to 2000 and 2008
The typical financial disclaimer reads, “the past is no predictor of the future” but learning from historical markets is definately a good thing to do. For some time now Robert Prechter has been telling us to expect a double dip with 2008 being the first wave down. Today we are going to look to Chris Ciovacco, Chief Investment Officer of Ciovacco Capital Management. Typically Chris is a bit more upbeat than Prechter, lets see what he has to say as he compares current market conditions to 2000 and 2008. ~ Tim McMahon, editor
Parallels To 2000 And 2008 Should Not Be Ignored
Before you read your favorite author’s work relative to the outlook for today’s markets, we invite you to go back into their article archives and see what they were saying in early 2008 and the summer of 2008. On February 13, 2008, with the S&P trading at 1,348, we published Technical Breakdowns Call For More Hedging. Unfortunately, much of our analysis from early 2008 applies to the current market, which is showing indications that a new bear market may be on the horizon. Continue reading
