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BCA on the Stock Market Replies |
HenryTo
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 Posted: Fri Feb 01, 2008 11:05 am Post subject: |
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Yes, should the Feds fail to "jump start" consumer spending or bank lending, then all this will be thrown out of the window. But that ending is not pre-ordained, even though the financial markets had already discounted the possibility of a mild recession a couple of weeks ago.
I will continue to keep track of all my leading economic indicators. For now, they are still holding up - but as the ECRI said this morning, we are now right on the edge. |
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rffrydr
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| Posted: Fri Feb 01, 2008 10:13 am Post subject: |
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...and then there's recession 
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HenryTo
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| Posted: Fri Feb 01, 2008 9:58 am Post subject: |
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| texfly101 wrote: | Henry,
As I read this, BCA's call is for a sideways market with limited downside risk. I think this supports your signal of 100% Long allied with caution if I remember the commentary. I remember that you very cautiously optimistic in the call doing a lot of great research to validate it. Just playing the devil's advocate, what would a possible scenario be that would bring about the actuality of downside risk happening? Sometimes it pays to watch what shouldn't happen so that you get out of the way of a bus in the blind spot of the rear view mirror. |
Hi DJ,
In the very short-run, I expect significant resistance at the 50-day moving average - which is currently about 1,430 on the S&P 500.
http://stockcharts.com/charts/gallery.html?%24sp500
That being said, I am not as concerned about the S&P 500 (even though our system is based on the Dow Industrials which has a very high positive correlation with the S&P 500), as the stocks I am holding now (and which I have discussed to subscribers) - namely selected stocks in the consumer discretionary and financials sectors, Japanese small caps, and Taiwan.
However, let's play devil's advocate and imagine that you are 100% long the DJIA or the S&P 500. What should you be watching so that you can get out before the bus hits, so to speak?
First of all, I expect most of my "topping indicators" (and there aren't many of them) that have worked in 2007 to be not of much use anymore. This includes looking at divergences, the OECD leading indicators, the Euro-Yen exchange rate, the Lowry's indicators, and so forth. We need to throw everything out the window and start over.
The reason I am saying this is because the nature of the market has changed. Since March 2003, almost every sector (some more than others) have consistently risen. The character started changing in early 2007 as financials underperformed. From July onwards, "value" started to underperform as well. Value managers and the folks at the Motley Fool's "Inside Value" publication can attest to that.
Most recently, the overperformance of financials and consumer discretionary (especially retail) is merely rotation - from energy and materials back to these hugely oversold factors. I expect this "rotation" to turn into something more serious. As the Euro Zone, Australia, New Zealand, South Korea, and Japan slows down (significantly) this year, especially in light of their continuing tight monetary policies (not to mention China's), I expect the price of crude and other commodities to continue to come down for most of this year. That is, I expect energy, materials, and industrials to underperform this year, while financials and consumer discretionary should dramatically outperform (labor costs in the rest of the world should decline as well as the global economy slows, resulting in higher margins for the domestic retailers). In other words, I expect a pretty narrow market this year, and I expect the P/E of the S&P 500 to rise as well.
The Fed has continued to be on an easing bias. The Administration and Congress is pumping money into the U.S. consumer. Freddie's and Fannie's conforming limits will be raised in high-price and high-median income areas. It is all about liquidity at this point - that is, domestic liquidity with virtually all the benefits flowing to consumer discretionary items and financials. Assuming that none of these "rebates" go towards pensioners or to those who don't pay income taxes but pay social security taxes (moral issues aside), then most of this discretionary spending will not go into energy spending. Sure, some folks will go on a vacation because of the rebates. But to the extent that some have already made up their minds regarding extended trips, they will most probably spend the extra money on more lavish dinners, better hotels, etc. We just got a huge "put" not on the S&P 500, but specifically on the financials and consumer discretionary sectors, through a huge easing (one not seen in 25 years), a fiscal stimulus, and a raising of the GSE limits. We are in uncharted territory - not many folks have realized this yet, including most of the Wall Street analysts.
On a global basis (excluding Canada), things are now working in our favor as well as the rest of the world continues to embark on a tightening policy. As I mentioned before, this will be bearish for crude oil (OPEC now wants to curb supply ASAP) and other commodities. Should crude oil decline going forward (a $15 decline is equivalent to about 1% US GDP, or the amount of fiscal stimulus over a period of one year), then this will be another "shot in the arm" for the consumer discretionary sector.
So going back to your question, the major thing I would pay attention to going forward is domestic liquidity - chiefly the Fed's easing bias, but also the efficiency of the fiscal stimulus, whether the GSE limits will be extended indefinitely after 2008, the crude oil price, etc. Secondary indicators to watch will be monetary policies of other central banks (including Canada's), CPI readings, willingness of domestic financial institutions to lend, etc. Ignore breadth, volume, and most other (traditional) "topping indicators," but continue to watch sentiment. In terms of the market's character, I expect this to be similar to the market post Fall 1998 and into early 2000 - where the market continued to rise anyway despite huge divergences in breadth, volume, and in the performance of other global markets.
Hope this helps.
Best regards,
Henry |
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rffrydr
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| Posted: Thu Jan 31, 2008 9:46 pm Post subject: |
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Surrender is not an option! 
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texfly101
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Joined: 22 Oct 2007
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| Posted: Thu Jan 31, 2008 6:13 pm Post subject: |
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Henry,
As I read this, BCA's call is for a sideways market with limited downside risk. I think this supports your signal of 100% Long allied with caution if I remember the commentary. I remember that you very cautiously optimistic in the call doing a lot of great research to validate it. Just playing the devil's advocate, what would a possible scenario be that would bring about the actuality of downside risk happening? Sometimes it pays to watch what shouldn't happen so that you get out of the way of a bus in the blind spot of the rear view mirror.
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HenryTo
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HenryTo
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rffrydr
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Joined: 30 Oct 2005
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Location: Sunny California
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| Posted: Fri Aug 31, 2007 10:53 am Post subject: |
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They all like `98 now. It wasn,t qbout the liquidity then it zqs qbout the money.
| Quote: | | In this cycle, commodities, government bonds, real estate and credit products have already largely been inflated but stocks still have room for further multiple expansion once the current turmoil in the credit market subsides |
Yield is "dead"--and so too it,s EFFECTS.
To wit: steel...consolidqtioin...Brazil;........."Real Assets." The question is, to what extent is the stock market an epiphenomenon? Nasdaq that`s the 1998 dollar question.
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