- 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?
Despite the huge scares on the stock market in Feb 2010 due to the Greek debt and inflation fears, the market rebounded and are hitting new 52-week highs around the world. Many analysts are warning that the market has gone ahead of itself and urging investors to be cautious and technical analysts lament the lack of volume in the markets and the VIX (volatility index) hitting new lows signalling complacency. I have a completely different view from them - when has markets rationally discounted fundamentals and reality reliably? Despite the widespread warnings by pundits on the market, and serious worries that the market is due for a selloff (soon , say like next week!), I believe things will turn out different. But before I get on to put forth a summary of my thoughts, I want to say I'm not a professional and you should take what I do with a pinch of salt.
The market often makes fools of those who try to predict it. Indeed most of the time, it behave unpredictably in a random manner like Brownian Motion - the Efficient Market Hypothesis. However, we are not in usual times post-financial crisis and there are a number of things I noticed and I'll put some of them in this posting to explain what I see in the coming months.The chart above shows the Baltic Dry Index[Link] BDI. The BDI shows the price index of shipping costs of raw material. The index is non-speculative in nature and frequently used by economists to indirectly measures global supply and demand for the commodities shipped aboard dry bulk carriers. It shows that while demand has firmed, it is nowhere near the what it was in 2008. In a speech by Premier Wen a few weeks ago at China People's Congress, he spoke of the risk of double dip recession[Link]. It really becomes quite tricky for China as they are seeing inflation due to their massive stimulus but insufficient export growth to maintain GDP growth. Jim Jubak's recent column talks about this problem of galloping inflation in developing countries & tenuous anaemic growth in developed (western) economies.
A few months ago, I wrote this rally is liquidity driven and will rally against bad news on the economic front. As this rally is driven by liqudity, it doesn't matter how good the economic news gets once the liquidity is shutoff (interest rates rise, monetary policy tightens), the stock market rally will end. I won't go through all the details because there is a lot of statistical data I go through and some amount of modelling that I do in my spare time - a lot of relates to how much leverage traders have taken either on carry trades or margin trades. Here is what I believe will happen, we can revisit this later when various events on the stock market occur and I'll try to find some time to explain how these results were obtained:
1. Despite naysayers saying this is a market is 'double topping' (the first top was in the early Feb and we are at the 2nd top and poised for a fall), there is enough liquidity to drive this market higher. In fact, I believe the market will rise and the rate of rise will increase.
2. The market will peak in mid-May 2010 (12 May 2010 as the best estimate) and fall abruptly.
3. It will fall until roughly the 1st week of July 2010 before it attempts to rebound and peak in the last week of Aug 2010. This 2nd peak may or may not be higher than May peak will mark the end of this rally.
I would be selling off most of my stocks in May 2010 and that will be the end of my financial adventure that lasted for more than a year. We can come back to revist this post in the later part of May. My models should have greater visibility on (3). The forecast are based on market liquidity and cannot take into events like 911 that throw things completely off. Other issues like European debt will fall into the background and based on initial jobless claim figure we should see the single most worrying economic issue that of 'jobless recovery' start easing, that will help to propel this market higher...driven by ample liquidity in the system and to its peak by drawing money at the side waiting for the economic picture to turn for the better....