Do You Believe In The US Bull Rally?

[BlueDaze]

Many bears have been throwing in the towel... I continue to expect a US (and possible) golbal recession in 2007, as predicted by the inverted yield curve (now in the 50% probabilty region).

Still, I have come across a number of "bullish" views on why the rally will last much longer (2009-2009).

I re-produce below the key extracts for the positive views and welcome your thoughts.

******

Bull #1

"I don't think we will see any major market correction at least till May next year. I really think 2006-2009 will be a raging bull period.

My opinion was formed due to 2 factors: demographic trends and stock-cycle trends. Demographic trends will take a long time to explain, but the stock cycle trend should be enough to convince me that something is brewing.

In all industry cycles, there are always 4 stages: innovation, growth, shakeout and maturity. To take an example, say internet. There is an innovation stage (around 1994-95), Growth stage (around 1999-2000) then shakeout stage which is basically a correction stage where it will get rid of the smaller companies. Maturity stage will be when the surviving leaders have their race to the finish. Back in 1920, the same industry cycle happened for the auto industry (which can be considered the tech industry then). And to make it more interesting, both the auto (early twenties) and tech (early nineties) had about 50% penetration on the society before the correction happened. Of course, for auto, we knew that GM survived the race and it was the leader till now.

Looking at the above, there is an uncanny similarities between the early twenties and now. If I were to take GM's chart from Feb 1912 to Feb 1922 and put it against Intel from July 1992 to July 2002, you will see an exact similar pattern! . And if that's not enough, consider this: Dow fell 45% during the 1920 correction, similar to the 2000 correction. Auto Index fell 70% during into 1922. Nasdaq fell 77% into 2002. Freaky, but true.

Of course, just looking at the above is not enough. There is another 3 more stock cycles that coincide with 2006-2009. These are:

1) Dow Jones 40-year Cycle

Since 1900, DJI has a habit of going up till the 30th year before coming down again (with a bang) between the 30th-40th year.

2) Dow Jones Decade Pattern

If you were to study weekly data from June 1900 - December 1999, you will notice that there is a decade pattern. There is enough data here for 10 decade patterns and if you take this 10 decade charts and put them together, you'll see the same thing each decade. That is 1st year to 3rd year, market will be mainly down and suppressed. From 4th year to early 7th year, market will rally. Then there will be a sharp correction on the 7th year, till to about June-Oct of the 7th year before the DJI shoots up again (even higher than the 7th year) extending into the 9th year.

3) Presidential Cycle

Historically, the 3rd year and the 4th year of the Presidential cycle has the most gains. This coincide with 2007 and 2008.

Looking at the US condition now with their trade deficit going higher every month, I think US is living on borrowed times. And I think if a repeat of the 1930 bubble were to happen again, it comes from these areas:

1) Spending from the baby boomers.

2) Most importantly, which didn't happen in 1930, is that there are billions of US dollars waiting to be poured back into US every month by China and Japan. These dollars partially drove the NASDAQ from 1996-1999 and the US property markets. US cannnot issue T-bills to China and Japan forever and I suspect they would pour some back into the US stock market as well, again.

I could also touch on US demographic cycles which shows their spending habits based on the current age of the population there (and that habit will support the stock market between 2005-2009).

*******

Bull #2

I do support the view that the equity bull will continue to run, perhaps until at least end 2008. not too sure whether i am right on this, but to me, it's really all abt excess liquidity in the monetary system as evidenced by:

1. Ultra low savings interest rates in most countries (which in turn provides cheap debt financing from the banking system)

2. Low bond yields, even that of EM bonds and 'junk' bonds (yields can't keep falling, investment monies have to go somewhere else, like equities n commodities)

3. Some indices remain below historical highs: S&P500 still off by 10%, Nasdaq and Nikkei still way way off. While those peaks are indeed created during their respective bubbles, I feel they are indicative of the monies invested then which are uninvested now.

4. Increased equity investment by the Asia (esp. Japan, Korea, China) which had shunned equities after the Asian financial crisis but seem to be gradually returning to the market now.

5. Pension funds around the world increasing exposure to equities, rather than traditional bonds.

I feel equities are already fairly valued at the moment but will probably continue their rise with the global search for investment returns.

********

Bull #3

I agree with you that in the short term, we might experience yet another mini-bull. Your suggested time frame of 2006-2009 makes a lot of sense. The given factors are sound. The baby boomers control much of the wealth in the US and yet, have lost much of it to the 2000-2002 bear. They thus might have to be invested in the stock market beyond their retirement years in order to further boost their nest egg. Positive.

Their standard of living has increased and they will spend more to maintain this. Double Positive.

Furthermore, as you have rightly pointed out, vast liquidity washes through the entire financial markets. This is perhaps an important reason to the lack of implied volatility as seen on the VIX, which has been on a downward path since the September 11 attacks. (which coincides with the US fed increasing the money presses and pumping even more liquidity into the system).

Every market correction since 2003 has been short lived in either duration or in magnitude, as every depression in price is immediately siezed upon as a buying opportunity to put this vast liquidity to work. As China develops their knowledge in finance and investments, they will inevitably go on a buying spree of equities (most likely US ones) instead of the ultra safe haven of US Treasuries. This also solves the problem of what to do with their vast reserves. If they buy other assets, the USD will fall as word gets round. If they purchase US equities, not only is that USD-positive, they will actually boost the return on their investment as opposed to investment in Treasuries. That is the investment power the financial world is going to be experiencing soon. That is ultra-equities-positive.

Also, US stock market indices have halved in valuation terms since the 2000 peaks. The S&P is now trading at average historical earnings multiples, which suggests any future correction will, at the very least, not be half as serious as the 2000-2002 one (which implies we are looking at possible 20-30% corrections at MOST).

[BlueDaze]

[BlueDaze]

[BlueDaze]

[BlueDaze]

March 17, 2007

Pivotal Events
by Bob Hoye

http://www.safehaven.com/article-7163.htm

The following is an excerpt from Pivotal Events March 15, 2007.

Signs Of The Times:

"As Goes Goldman, So Go Markets"
"Dubbed 'The Tell' Titan May Now Top Citigroup
as Street's Best Indicator" - WSJ, March 13

"Mortgage Shakeout May Roil CDO Market"
"Subprime Defaults Lead to Wavering at Big Street Firms" - WSJ, March 13

Collateralized debt obligations (CDOs) are a securitization of a pool of individual mortgages and the volume of issuance of BBB, or lower, soared from around $5 billion weekly in September to around $22 billion in late February. The drop to around $7 billion looks like the conclusion of a blowoff.

However, despite the loss of liquidity in this sector, the financial future remains bright. The Fed will cut administered rates.

"The Fed is likely to only to NOT raise rates but should eventually lower them. When they do it will trigger a further expansion of the economy and help the bull market along even further." - March 9

Behaviour of Short Rates Following 3 Great Bull Markets
(In Senior Currency Terms)

1873: Soared to 9% and declined to 2.5%
1929: Increased to 6% and fell to 1.5%
2000: Increased to 6% and declined to less than 1%

These are the biggest bull markets within the period when senior central banks could materially change the benchmark rate.

In 1873, it was the Bank of England's rediscount rate, in 1929 it was the Fed's discount rate, and in the 2000 example it was the Fed's targeted Fed funds rate.

In each case, the changes in the administered rate followed by a number of months the change in short-dated market rates of interest.

One observation is that during the period when the senior central bank could materially change its administered rate, interest rates have increased with a great boom and declined with the consequent contraction and bear market for stocks, commodities, and lower-grade bonds.

Another is that over the period of our review of the behaviour of short-dated market rates of interest, the most dramatic declines have only occurred following a financial mania.

In each case, the senior central bank followed the decline in market rates until near the end of the bear market; in so many words, rising short-dated market rates is one characteristic of a bull market. And, going the other way, declining rates is one characteristic of a bear market.

Treasury bill rates reached 5.18% on February 23 and have declined a little to today's 5.02%. Given the now rapid decline in liquidity in the sub-prime sector, the rippling out to the big bank stocks seems appropriate. Declining through 5.0% and accompanied by further steepening of the yield curve would indicate that the inevitable credit contraction has started.

In which case, it is best to recall the old saying the "Credit is suspicion asleep."

Bob Hoye
Institutional Advisors

[rffrydr]

And that's why I'm only short one corn contract. Don't think there is alot of downside with La Nina looming. Will be traded AS IF bearish for MidWest Summer--and can wind up good for crop given odds of a wet spring and late planting.

So much production tied into ethanol and the pinch only started to be felt up the food chain makes for a interesting backdrop to higher wages, lower employment scenario that we used to call, "stagflation."

Have you considered THAT resolution to May's tensions, Prospero?
_________________
Today is the Tomorrow you worried about Yesterday!

[BlueDaze]

Evelyn Garriss, Editor, Browning Newsletter

The El Niño is fading – apparently it peaked in January and now it's been diminishing. And experts are looking not just at the satellite pictures of the top of the Pacific, they are taking samples of the Pacific waters underneath and they are finding some extremely cold water; and they are now saying that the Pacific is going to be cold. It's going to have a La Niña. What we can expect when we have a La Niña are the winds are going to be absolutely ideal for creating hurricanes in the Atlantic and for aiming them at the East Coast.

So as opposed to, like, what we saw in 2004 and 2005, that rippled through the Gulf, you know, Evelyn, that reminds me because I was watching the Discovery Channel a couple of weeks ago, and they were talking about a hurricane in the late 30s when we were going through a warming cycle and it hit Long Island and hit the East Coast. So is that the kind of thing that you're talking about, because it's been a while since the East Coast has been hit by anything serious.

We're going to see a lot of warm water, and a lot of storms aimed towards the gulf. I wouldn't be surprised if we have at least two hits in the Gulf oil producing area. I'm not saying two hits both in the American area because Mexico has a lot of production in the Gulf, but I expect at least two hurricanes in the Gulf oil production area.

La Niña winds are also ideal for aiming hurricanes, especially early in the season, into North Carolina. So I would say that the gulf and North Carolina are at quite a bit of risk.

This summer, a lot of it depends on when the La Niña occurs. If the La Niña has not appeared during the summer, then we can expect a hot summer (after what might be a very cool spring in some areas) with the heat being towards the east. If we have an La Niña starting in the middle of summer, then instead we're going to see that blast of heat throughout the Midwest and throughout the grain belt.

If the heat wave blasts in July when the corn is silking, then it really destroys the quality of the corn and destroys the crop. Sometimes, however, especially if we have a late planting in the spring, if the heat come in August, it matures and ripens everything very early – so the almost compensates for a cool spring by having a very warm, toasty growing season. So it depends on when the heat wave hits. If it hits in July, it’s going to really affect our corn production, and that’s bad news because our ethanol demand is very high.

One of the things people don't think of but coal-burning plants, and nuclear plants need water to cool off their equipment, and if the water gets warm; and a lot of those places, especially Canadian plants around the Great Lakes, depend on lake water, and if the temperatures go up and they depend on lake water, they can't cool off the equipment. And they end up sometimes having to cut back electrical production. So you have the heat raising electrical demand, and yet the heat makes it, so they have to cut back production – and that really creates tension.

[rffrydr]

38% retracement.....is that all there is???

1890s, the "Gilded Age," interesting:

http://en.wikipedia.org/wiki/Gilded_Age

Prospero wrote:

[BlueDaze]

From another forum...

27/02 /07. The day when stocks dropped like a stack of dominoes after months and months of rally in most global markets. Surprisingly, despite that huge drop, there weren't many gloom and doom talk but the markets were flushed with recovery talk instead. And to further compliment these "recovery talks", the market rebounded last week to the joy of many worried investors.

But is this correction truely over? Is that drop, like what most analyst say, a "fluke"?

Of course, no one will have an exact answer, but a study on the recent price action on the major markets can give us a hint of what is happening and what we could probably be facing in the coming months.

In this article, I will present a study on the market action of Dow Jones Index and try to conclude where the indices could be heading.

The DJI gave hints about the recent correction months ago and it is not something unexpected. The question now is will this rebound short-live or will it continue to rally to the same level before the drop. Let's us first look at the recent daily chart of the DJI.



The chart actually looks great for a good rebound especially when you have the RSI slowly coming back up and the MACD is preparing to do a crossover from below. These are all signs of a healthy rebound. However there a few issues with the above rebound. First there is a divergence with its volume as shown above. During the drop, the volume surged, but during the rebound, the volume was weak. A big clue that the big boys (fund houses, banks, institutional investors, hedge funds, etc) are not entering the market (despite all the recovery talk they said). As for the MACD about to do a crossover, we need to look carefully at the MACD itself. Normally when there is a big split between the MACD line (Black) and the signal line (red), there is always a tendency for the MACD to go back near to its signal line. So whether will it really do a healthy crossover remains in question.

Also, the zone between 12336-12350 is a resistance barrier. 12336 is its Fibonacci resistance level as shown from the chart below :



Another key in forecasting the optimism for DJI is to look at its market action during the last 5 days where the recent rebound occured.



Very interesting to see from the above that there is almost a sell-off at the last few hours of each trading day (except Tuesday). Market always open based on the views of amateurs and close based on the perceptions of the professionals. You can see from the above, the professional traders are not buying into this rebound (infact, they are using the last few hours to sell-off)

Perhaps we should go one more level higher to see why the professionals are not buying into this rebound. This is where I see a lot of recent chart interpretations fall short. Many would analyse only the daily chart and conclude from the RSI and the MACD that this rebound is going to last. Problem is, what is going to happen the next few months will not be shown in the daily charts. If only they take a look at the weekly chart instead



Now from the above WEEKLY chart, the situation becomes clear. The MACD infact,is doing a cross-down as oppose to the cross-over in the daily chart. Because this is a weekly chart, the signal from the indicators are far more powerful than those appear in the daily chart. I also included the on-balance volume indicator. Now this indicator not only tells the volume performance but also the 10-week moving average of its volume and its closing price. When the volume do a cross-down against the 10-week moving average (as shown above), it is a good clue that the index might head lower in the following weeks. Notice that the correction in May 2006 started the same way as shown in the on-balance volume indicator.

Will DJI go against all odds and shoot right back to the level before its drop ? I think it will, but not anytime soon. Weekly Stochastic is still at their overbought levels, so I think it will take a while for this correction to be truly over. Meanwhile, DJI will at best go range bound or worse, might even head lower.

Before I end this article, do note that all these comments were made from technical analysis studies and they can go wrong. No one can tell exactly what the market will do next, so pelase do due diligence when reading this article.

[rffrydr]

They've resolved it--just that the numbers won't get in line.

These are uneventful times:

http://accruedint.blogspot.com/2006/12/and-now-your-moment-of-bond-market-zen.html
_________________
Today is the Tomorrow you worried about Yesterday!

[Prospero]

Thanks Henry, you're a star. And a Happy New Year to you too!

Looking at the data from 1907, it looks like there are some similarities in terms of timing. Weakness from 1901-1903 (and the end of the 1890s marked a serious bull, right?), and then a sharp rally off the lows from 03, eclipsing the previous high. But the details are obviously very different.

Incidentally, I am playing with the idea that a tight money scare might be on the way. Remember that whole inflation/deflation debate from 6 months-1yr ago? It doesn't seem to be resolved, it's just people have forgotten it. I think the surprise of the year may be the Fed starting another hiking campaign and when people catch on (maybe by late spring) the market may collapse for a few months before taking off once more. I'm not putting any money on this yet - just something I'm wondering about.

I agree that there doesn't seem to be a lack of money. But people have gotten used to this easy-money scenario now, and as soon as there's a bit less, people will feel the difference.

[HenryTo]

Prospero,

I'll email you some long-term data on the DJIA.

As far as 1907 goes, there were ample signs that the world monetary system was already in a bind by early 1907. Borrowing to sustain economic growth - combined with the rebuilding of San Franscisco after the earthquake of 1906 - were for the most part responsible for the tight money. In today's world, the Fed would have eased monetary policy way before the Fall of 1907, but that was impossible under the world gold standard at that time.

Anyway, there was a scare early in Spring. Livermore made some money during that time, and then took off on vacation during the summer. While vacationing, he sensed that money was continuing to get tighter, but at the same time, the stock market was continuing its rally. He came back to the US and initially lost a substantial amount of money shorting, but come the Fall, he sensed he was right and made a killing on the short side.

Is there a lack of money today? I would say "no" - given the immense amounts of cash sitting on corporate balance sheets, private equity shops, and foreign central bank reserves. For now, the Yen carry trade is also very much alive, and I would not be overly concerned until the Yen (100 Yen) declines to the 0.78 to 0.82 area.

Have a great New Year's! And you too Mr. Dribble!

[Prospero]

As far as I know, most bull markets put in a serious fake to the downside before they finally exhaust themselves (e.g. LTCM fallout in 1998). I suspect that in the next few months there will be some kind of accident which should set the stage for a real blowoff into 2008. And May can't be compared with 1998. Percentage wise, 1998 was about twice as great a drop as May. In terms of standard deviations, 1998 makes May's action look run of the mill.

On an even more speculative note, does anyone have a really long term chart for the dow? I keep getting superstitious remembering that Jesse Livermore made a killing as a bear in 1907, and need to be convinced that we aren't in a similar situation 100 years on...

[henry dribble]

here is a thought for the new year.
it is very difficult to predict the future, when it comes to humans anything can happen, but you can evaluate the odds.
personally I think that the odds favor that we will see 1325 in the S&P in 2007. I see the strong likelihood of that print.
if we do not then I think the odds increase that we will see it in the next year.
it is hard to predict when we will see this print since most investors, traders, etc. are trend followers. there is a desire to squeeze the most out of a move. stay on the train until the last stop. in the months ahead it will be easy to recognize how much effort people put into discussing how to do this. how to recognize a top so you can get out.
but it will not happen and most people will end up selling into or holding into the next trend which will be down. and that trend will pick up steam and people will stay to late in that selling train. or get defensive. people like crowded trains for some irrational reason.
so why not just prepare for the next entry point?
if you agree that 1325 (or perhaps you pick your own) is likely no matter how long you have to wait for it, then why buy now when now is higher than 1325?
why not prepare psychologically and financially to buy that print?
I say this since I think most people are hampered in buying bottoms since they missed the last top. so they are bleeding a little and the pain affects their ability to enter. also they have less cash to take advantage of it, the sale price.
I find that since I have a tendency to exit trains early I get on them early too, since I do not recognize the pain of the majority.
is staying on the train longer really worthwhile? remember if we are going to see 1325 then all the supposed gains above that disappear if you do not get off prior. you have to get off, that is the key.
and after you get off while you wait for the next train you get interest. so interest plus saving 5% in price from here. those are good odds.
and last thought if you prepare now and say 1325 is a good price then when it comes you just do it. hold your nose and plunge. reread Henry To's facillating last summer to see how hard it is to think your way thru a bottom. and he was in cash waiting for an entry point. pick your viewpoint:
1325 with bearish sentiment, high vix, etc. then just do it.
take the sale price and forget the trend.
the trend is not your friend if you do not get off in time. the trend - the uptrain - is greed.
happy new years from Buenos Aires where everyone go hit by the train in 2001.
_________________
henry dribble

[nodoodahs]

"probably due to the holidays" ??? Who is he trying to kid???

"some speculation at work here" of course. There always is.

Trendlines are somewhat arbitrary. Draw one from the low of 7/21 to the low of 8/11, touching the bottom of the wick and not the body of the candle. That line has not been violated.

See how it rarely breaks the 20ma? His trendline hides that the 20ma is still pointed up. If you put a 35ma on the chart, you'll see it hasn't been broken since the rally, but it has been bounced off of. If you want to be a bear, it may be sensible to be a bull until the 35ma is actually broken.

The majority of damage on Nov 27 was done by 10:10 am, selling slowed after that – 100 points in 40 minutes followed by 60 points the rest of the day – suggesting that wasn't that the trendline got violated and then things accelerated, but rather that the market moved down early on NEWS. Perhaps someone should check the news archives for that weekend.

Was Nov 28 a selling opportunity? Or a buying opportunity?

I still think it has legs and will play it that way until it shows me otherwise. Your mileage may vary.
_________________
He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[BlueDaze]

A TA look at the Dow (found at one of the investment forums I frequent):

"The chart above strongly suggest DOW could be correcting soon. Both momentum indicators RSI and MACD are showing strong negative divergences in their momentum. Volume has been relatively the same as shown in the horizontal green line with a huge drop off recently probably due to the holidays but still DOW manged to make new high. Some speculation is at work here which will not last.

The level to watch for should be around 12400 which is not far. It if drops below this, that gives a price confirmation to both the momentum divergences.

Interesting to note from the chart above that when DOW dropped below the first uptrend line (the top orange line) on Nov 27, it was a long red candle. After that, notice that it never got above the first uptrend line again.

There are a lot of people watching the trendline and when it drops below, it got a big sell-off like the one on Nov 27."