Volume 2, Issue 8
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EQUITY LOWS ARE RETESTED ONE MORE TIME JUST LIKE 2002 – 2003. A WHOLE HOST OF FACTORS ARE BETTER NOW THAN THEY WERE AT THE OCTOBER AND NOVEMBER 2008 LOWS, SO THE RETEST SHOULD BE SUCCESSFUL. EURO TURNS POSITIVE VS. YEN. BUY SIGNAL FOR CHINESE STOCKS. SELL GOLD AND GOLD STOCKS.
Equity markets reached a panic low on Oct. 10, 2008 and then declined to a lower capitulation low six weeks later on Nov. 21. While a double bottom is a classic pattern, retesting the low for the third time is not without precedent. In fact, it happened at the end of the last bear market. The 2002 – 2003 bear market ended with a double bottom on July 24, 2002 and Oct. 10, 2002. Even though equity markets improved into the end of 2002, it seemed very likely that the US would invade Iraq in early 2003. Therefore, most of the gains made after October were lost in early 2003 until a week before the invasion began. Equity markets started a give year rise on Mar. 13, 2003, one week before the invasion of Iraq, just as the SARS virus was causing fears of a global epidemic. You can see the arrows marking these three lows on the chart of the SP 500 Index below. The TSX and most global markets followed exactly the same trend. A chart further below shows a current price of the SP 500 with the arrows marking the October and November 2008 lows.
How the SP 500 Index and most other global markets retested the lows one more time in March 2003 before a major advance.
The Dow Jones Industrial Average has declined below the November lows while the SP 500 and the TSX are trading right at the lows. In the past, markets have remained above the lows 61% of the time and moved below them 39% of the time. A chart such as the one below does not in any way convey the fear and anxiety that accompanied the lows in March 2003 just before a war was expected to occur. I recall it being very similar to the apprehension we feel today. When news of the SARS virus spread, fear increased, but equity prices kept rising.
In 2003, there was widespread fear and pessimism due to years of stock market declines, the threat of war and a global epidemic. In spite of this, the markets started a powerful rally that lasted 12 months before a small decline. Now, the current financial crisis is causing fear and pessimism. I have found that the situation is always different, but the patterns of markets, as determined by investor behavior, are often very similar.
As the market averages test the lows, it is important to be aware of some of the many factors that are better now than they were during the October and November lows. Here is a brief list addition to the factors mentioned last week: one month US Treasury Bill are yielding 0.16% instead of less than 0% percent, the Canadian dollar is at $0.80 US instead of $0.77 US, the euro is higher compared to the Japanese yen (the euro usually declines as the flight to safety increases), the Dow Jones Utility Index is 11% above the lows, the US Semiconductor Index is up 14%, the Chinese stock market (the Chinese economy is becoming more influential) is 26% higher, gold stock indexes are 100% higher, US retail sales were up for the first time since last July, real estate sales in California were up 100% in 2008 compared to 2007 and the Conference Board’s Leading Economic Indicators (LEI) have been up for two months in a row. The worst of the recession has just about always been seen when the LEI are up for three consecutive months. One more month to go? This all suggests that the retest should be resolved with a move to the upside just like 2003.
Bonds - The trend for bond prices is still down.
Commodities - Gold and gold stocks are likely to at least pause in the weeks ahead. Does this mean that the financials are bottoming? Oil is building a base, but no breakout yet.
Currencies – A buy signal is issued for the euro vs. yen. CAD$ vs. US$ is steady.
This chart of the SP 500 as of last Friday, three months after the Nov. 21 lows. A five-month period of base-building like this usually happens before a rise, not a sharp decline.
I am reprinting this table created by Dr. Janice Dorn, a financial psychiatrist (firstname.lastname@example.org). I am grateful for her permission to publish it here for you.
This shows typical investor emotions during a market cycle. I would say that the Oct. 10, 2008 low was the panic stage and the Nov. 21 low was the capitulation stage. There is not nearly the action and volatility now compared to October and November lows so it makes sense that this is the despondency stage, which usually occurs before a rise. Depression is the next stage. This occurs as the markets rise, because investors have no faith that it will last. When it does, hope returns.
This index of US bank stocks shows that it has lost 82% of is value since it peaked exactly two years ago from today. It has declined 51% just this year alone! This sector has dragged down the global market averages. Even though some US and all Canadian bans are very healthy, the poor decisions of the minority are hurting them all. I believe hedge funds are short the financials and long gold. How much more profit is left in shorting when the cost to buy a share of Citicorp or Bank of America cost less than a greeting card? The financials continue to be very oversold. It was good to see the BKX refuse to decline today.
Dreadful performance of US financials is responsible for much of the weakness in the TSX and other global markets. It is positive to see the oscillator so much higher than it was at the lows last fall.
The long-term oscillator for US markets are declining but are also higher than they were earlier. This has sometimes been a positive sign in the past.
Most will be flabbergasted to see the stock market of a communist country lead all other world markets to the upside. It is up 26% from the October low. The two green dots on the far right show that it is the first major market in the world to turn positive for the long term! You can see how accurate this indicator has been to determine the long-term trend in the past. China has $2 trillion in cash and is spending over $500 billion in a stimulus plan. This is very positive for the global economy, commodities and stock prices everywhere.
Gold and gold stocks have had a good run since a buy signal was issued on Nov. 24, 2008. The Canadian Index of gold stocks is up 40% and this US index is up 36% since then. Since the oscillator is so high and rolling over, it suggests that prices are due to at least pause, if not decline for a month or so. That is all it means at this time.
A buy signal was also issued for gold on Nov. 24 at $828. This was confirmed with a longer-term buy signal for gold and gold stocks on Dec. 29. At today’s price of $995, gold is up 20% since Nov. 24 and 13% since Dec. 29. Since gold has peaked when financials bottom, the inability for gold to rally much above $1,000, could have positive implications for equities and financials.
Oil is flat with a positive bias. It is down since a buy signal was issued for only one half of a normal position on Jan. 5, 2009 at $48. In hindsight, I should have waited for a few positive days before issuing the buy. That is one of the shortcomings of a weekly update instead of a daily one.
The euro sold off sharply when equities hit lows in October and November. Therefore, it is very interesting to see the euro turn positive vs. the yen when we are retesting the lows again! Buy 50% of a normal position now. This suggests that perhaps there is no more leverage to be eliminated. (Some investors borrowed yen at low interest rates to invest in equities.) It is an encouraging sign that this retest should be successful. The flight to safety and quality is not as strong as it was last year.