New Year, New High Hopes for Stocks
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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 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 II
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 II of the series. You can read Part I here. Check back in a few days to read Part III, or you can download your free copy of the Independent Investor eBook here.
Action and Reaction In the world of physics, action is followed by reaction. Most financial analysts, economists, historians, sociologists and futurists believe that society works the same way. They typically say, “Because so-and-so has happened, such-and-such will follow.” The news headlines in Figure 1, for example, reflect what economists tell reporters: Good economic news makes the stock market go up; bad economic news makes it go down. But is it true? 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
3 Bears for the Markets
These days there doesn’t seem to be much in the way of good news out there anymore. What with Greece, the looming recession and all the market technicals looking negative we have three big bears (at least) roaring in our faces. In todays commentary Chris Ciovacco Chief Investment Officer of Ciovacco Capital Management tells us how these bears are lined up and what to expect next. Tim McMahon, editor.
Greece, Recession Odds, & Technicals All Bearish
While inspectors from the International Monetary Fund, EU and European Central Bank, known as the troika, are in Athens to review the books, Reuters reported Sunday:
Greece will miss deficit targets set just months ago in a massive bailout package, sources said citing a budget draft being adopted by the cabinet on Sunday, in a setback in Europe’s efforts to stave off the country’s bankruptcy.
Two sources confirmed the new budget numbers, which predict a budget deficit of 8.5 percent of gross domestic product (GDP) for this year and 6.8 percent next year, compared with targets of 7.6 percent for this year and 6.5 percent for 2012.
With Germany hinting last week the terms of the bailouts may need to be revisited, these latest developments may put more pressure on financial markets as we enter October. Back in the United States, more economists and economic forecasters are migrating to the recession camp. From the Economic Cycle Research Institute’s (ECRI) website (9/30/2011) :
Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off. ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down – before the Arab Spring and Japanese earthquake – to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not “soft landings.”
From a technical perspective, September closed out with numerous long-term bearish signals present on weekly and monthly charts (see table below). The signals below tell us the odds favor bearish outcomes in October. Could stocks rally instead? Sure they could, but it is the lower probability outcome given the fundamental and technical backdrop. The downside potential of stocks and the euro we outlined on September 23 remains in play as we head into the typically volatile month of October.
See the full article here
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
Crashing Markets, Credit Downgrades- What Comes Next?
Tragic news about the United States economic atmosphere has been inescapable throughout the country and world for quite some time now. With constant debate over raising the debt ceiling, shocking losses in the stock market, devastating unemployment rates, and a downgraded national credit rating, it’s no wonder the country’s economic health has been in question. After a series of blows to the U.S.’s economic wellbeing, things don’t seem to be getting much better. The country’s credit rate fall has been of great discussion ever since Standard and Poor’s downgraded it by a full point on Monday, August 8th 2011. To add to the blow, the U.S. stock exchange ended the day that Monday down more than 600 points. Continue reading
The Nature of Rallies that Follow Massive Bear Markets
By Tim McMahon, editor
Typically the best time to buy is when everyone else is selling. This one motto has made Warren Buffett a billionaire. He’s said,
Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it…
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. Warren Buffett
So in October 2008, when things looked their worst he invested $3 billion in General Electric (NYSE-GE). Four months later the market began to recover. Buffett has always been a long term optimist but he is also a realist.
It’s never paid to bet against America. We come through things, but its not always a smooth ride.
Warren Buffett
Since the creation of the Dow index there have only been three “Massive” corrections, where “Massive” is defined as a decline of more than 50%. Two of them happened at the beginning and end of the great depression. The third one began in 2007 and bottomed in 2009 and we are in the process of recovering from it. The only other comparable market decline was the Nasdaq “Dot Com bubble” that burst in 2000 resulting in a 78% decline in the NASDAQ with the associated post crash rally beginning in 2002.
So the following chart from our friends at Chart of the Day compares the four rallies that followed the four massive declines, i.e. the current 2009 rally, the 2002 NASDAQ rally, the 1942 Dow rally and the 1932 Dow rally.
