Friday, February 05, 2010

Why the stock market will rebound and why you should try to get out anyway....

FURTHER UPDATE 6:20am 10 Feb 2010 - Markets have rebounded sharply since I posted this last Friday. Based on my models, they market will rally until May 2010 before it sees another correction. After that we will see one last peak in Aug 2010 before a more sinister downturn - you should get out in May or Aug...really! If you look through the recent "noise", the economic numbers and corporate earnings have been very good. In previous posts, I said that the closest "matching" and similar rally to this one is the 2003-2004 rally. For the next few months, I believe blue chips will show much greater strength than poorer quality stocks compared with the runup of past few months. In the next few days, you will see bad news suddenly moving to the background (surprise..surprise) and good news being played up ...investors will return with enthusiasm as if the last 3 weeks never happen!

UPDATE: 4:51pm 5 Feb 2010 - Extremely scary headlines on Bloomberg's home page : •Stocks Plunge, Euro Falls, Bond Risk Soars on Jobless Claims, Country Debt
Trichet Struggles to Convince Markets of Europe's Solidity Amid Greek Woes . Suggesting great instability in the markets. Will the market exhaust its downside selloff as I suggested or are the so-called fundamentals so precarious we are on the precipice of a new crisis? Scary times isn't it?

Volatility has returned to the stock market. Yesterday night the DOW crumbled 268pts sending shivers down the spine of the steadiest investors. Last week it had 2 consecutive days when it fell by 200pts. I like to listen to "after the fact" explanations of all these falls. 2 weeks ago the falls were largely blamed on China for its tightening on bank lending. Last week's fall was blamed on Obama's newly proposed banking regulation also known as Volcker rules. The sight of Volcker standing by the side of Obama spooked markets and triggered a 2-day 400+ point selloff of the DOW. ...at least that was what CNBC said. The more sinister conspiracy theory version of this is Goldman Sachs wanted to show the US govt who's boss and sank the market with its program trading softwares - Volcker was from Chase a rival financial firm. Hmm...don't worry I'm still thinking logically, I don't believe in that piece of conspiracy theory, just wrote about it to show how creative people can get when it comes to explanations. Actually, I believe all these after the fact explanations have nothing to do with most of the market movements -while the market moved down, there was plenty of good news from the earnings front and economy that had no effect on the market. When the market moves down, journalists will pick the most plausible explanations to write or talk about.


As I type this, the STI has sunk 60pts and the HSI has sunk 650pts (11pm, 5 Feb 2010).

I want you to look at this chart of the HSI:

What it shows is the HSI having exactly one mini-rally and a selloff every month. In fact the size of these moves are not small rought 8-10%. The recent selloff being the biggest one. The 2nd observation I made over the past months the start of big multi-day falls on the DOW comes AFTER a fall on the HSI - usually without any clear reason. The current selloff came after a 400(?) point fall of the HSI after a positive trading session on the DOW - this happened a 2 weeks ago just after the DOW peaked. All the falls are accompanied by falls in commodities including gold which is suppose to be a crisis safe haven. The point I'm getting at is these 2-3 week falls of the market are caused by liquidity flows and highly leverage positions of some market players - they are like a mini house of cards that tumble when the wind blows slightly in an unfavorable direction....this explains the sharp falls in the HSI that occurs every month. It has little to do with the explanations we hear about on TV and read about in the papers - these events may serve as triggers for the selling but does not explain the magnitude. For example, the situation in Greece was known months ago....why did the market react so adversely?

After doing some other analysis much of which too detailed to post here - I believe the market will rebound in the short/near term (whatever logical explanation will be told to you by CNBC after it happens). You should really think about getting out regardless of whether this rebound materialise. The high level of debt that has build up by govts around the world may prove problematic in the longer run and leave them with little bullets when things go wrong. As for my own portforlio, much of my own exposure has been reduced in the past 2 weeks due to the trailing stops I put in. So while I believe the market may rebound in the coming days or a few short weeks, the medium to longer term outlook may actually be bleak.

19 comments:

Musicwhiz said...

I follow my own philosophy of never listening to the "gurus" and pundits. Analyze the companies you invest in and their financials, and invest for the future and based on sound prospects. That would be my advice and mantra.

To each his own.

Cheers,
Musicwhiz

Anonymous said...

The last tiger year 1998 saw great political and economic upheavals, especially in SE Asia.

So how about Tiger year 2010, especially politics and stock market?

Anonymous said...

Whoooaaa!!! Looks like lucky and gang gonna retire soon and enjoy life in real 1st world country. Or maybe u r gonna retire in the Bahamas or Hawaii as another bro pointted out in another thread.

Thanks for causing so much stress in our lives. Hope you(lucky) enjoy splurging all the $ u made. Remember to buy lots of hell notes for ur afterlife. But maybe u r smart enough to make more $ while being in hell.

Anonymous said...

Lucky,

what about the property for 2010? Still continue to be RED HOT? You should write something about it too.

Anonymous said...

I thot the selloff got something to do with the PIGS - portugal, italy, greece and spain?

LuckySingaporean said...

If the market is on its way down, it is PIGS, Dubai, high unemployment, etc to pick from as explanation. If the market is on its way up, positive earnings, stronger economy, low interest rates comes in handy as explanations.

The PIGS problem has been around for months before the sudden focus. The CDS spiked and that caused a "flight from risk" so everything else fell...so it was explained that way. I believe if it wasn't the PIGS, it will be just something else like weak job growth or US massive deficit etc that would have triggered the selling.

Richer than you said...

get a life and start making some money like i always tell you kid, as far as i know u are not quaified to tslk investment when you are a poor donkey still taking the mrt. discuss when u have a 300k car.

Anonymous said...

Market is down when sellers are stronger than buyers. Market is up when buyers are stronger than sellers. It is as simple as that. So if u know what the big and powerful are doing, u have got it. My feel is some of the biggies are locking in their profits. Liquidity is still plentiful. The direction will very much depends on liquidity. There may or may not be a double dip depending on how they managed their liquidity. They could well be hyper inflation if they leave the liquidity tap on for too long. A double dip will occur if they shut out the liquidity tap too fast.

Anonymous said...

Is the car one drives a good indicator of one's real net worth ?
A friend drove around in his $million sport car to cover up his recent retrenchment and to demonstrate that he is still doing well.I am not sure he can afford his lifestyle anymore. I also know of people who can affort a few RR but drives a Hyundai. There are also those who own a few private properties who take public transports. Anyway who cares so long as one is happy with one's life for to do so is to put your happiness in the hands of others. Not wise right ?

Anonymous said...

Mr Richer than you

Are you the same idiot who is forever embarrassing us proper PAP trolls?

$300k is a mass market car!

Rich folks understand value. spending $300k on a overpriced mass market car is for middle class fools/wannabes.

Anonymous said...

Mr Lucky

Have u ever tot abt who controls the media?
And CDS spreads?
And what is the volume of the trades by the primary dealers like GS?

Obviously GS making $$$ in 29 out of 30 trading days is nothing to be suspicious about :-)

Jokes aside ... I think most folks feared the worst when Obama took Volcker out of cold storage. But like I told u, it was business as usual when every1 learned that Volcker had been castrated. Its really sad to see some1 as respected as Volcker selling his soul ala Tharman (but u seem to like his nuclear option)

Anonymous said...

do you recommend we hold everything in cash?

cos i know property market is going down in Singapore (HDB going to introduce speculation measures soon), share market is in a downward trend too.

Anonymous said...

Perhaps the drop in equities is the result of the withdrawal of liquidity by central banks around the world. The reflation trade is over. Take cover!

Anonymous said...

Taking this major correction beyond, to a multi year bear is YET pure speculations; the credit must go to the blinkered doomsayers who managed to spellbind their herds into premature ejeculations.

Anonymous said...

Sirs,

I am a simpleton so please guide me.
Recently, our esteen miw increase the property tax so that they can give property rebate. When economices, perceive to, goes down, maybe this year,which may cause property to goes down, would our esteem miw decrease the property tax immediately?

Thank you.

Anonymous said...

The high level of debt that has build up by govts around the world may prove problematic in the longer run.


That has been so for a long time, and that is why they invented printing machines. Warren B had said that "fears regarding the long-term prosperity of the nation's many sound companies make no sense", he puts the money where his mouth not backside is by making his largest purchase ever. At a time when economist wannabes from all levels of life were elaborately regurgitating the latest abstracts of doomsday they have overheard in chat rooms, Warren bought the number two US railway company for usd 44 billions; and he was thrilled when cheap talking critics with lesser to nil track records were certain he should be doomed.

Anonymous said...

It depends how on how big your war chest is. If what you say is so right, then why are all the guilds in the brotherhood buying up zombie banks all the way from Ireland. Zurich etc?

Do they know something we dont know.

yangpunk said...

If market don't go up and down...how to make money? It can't be one way traffic either way right?

Newton's Law...what goes up must come down!

Prices cannot drop to zero right? Any high school kid can tell you the principle of supply and demand won't allow that to happen.

If all analysts put their money where their mouth is then they should all retire very very rich!

But what do I know? ... I am still a kid! ;)

Anonymous said...

May I know what assets you hold when you switch out of cash?