January 24, 2010
Market Summary: another downturn is unfolding and judging by the almost synchronous movement of all markets, this is likely the end of the bear market rally.
Well, this feels like my first post again. Many things in my blog are still not quite working like it used to be (e.g. the categories), but I’m trying to fix it as much as I can. Either way, I’m going to start building my archives again. My last post was about three weeks ago and I was expecting for more rally points before the corrective wave structure since March 2009 appears complete. On Wednesday Jan 20, 2010, US major indexes started a three-day significant (>1%) down moves. With gold and US dollar started their respective moves in early December and financial stocks like JPM and GS also didn’t make new high in January 2010, I am expecting this current downturn to be significant and will mark the end of the bear market rally.
I call it significant because I don’t know how far it will fall. Bob Prechter has called in his books that this bear market will bring the stock market to below 1,000 in DJIA (and similar ratio to other indexes), while Glenn Neely has called for a drop to around 4,000 – 6,000 in DJIA. My opinion ? It is going to be a long bear market and I will not call an end to it until the wave structure and other market forces (commodities, currency) turn around pretty much in sync like now.
S&P 500 appears to finish their bear market rally just above 50% retracement of what it has lost in the 2007-2009 bear market. As far as I see, the last three days have been the strongest down days in this rally, which shows in the 2nd chart (VIX) above. VIX shot up about 10 points in 3 days just like the 2008 bear market days.
On the technology side, Nasdaq appears likely to finish their rally just above 61.8% retracement of what it has lost in the 2007-2009 bear market. Although it appears stronger than S&P 500 and DJIA in this rally, we have to remember Nasdaq did not make new high in 2007.
Our commodity-rich Canadian stock index (TSX) has also turned around just before achieving 61.8% retracement of what it lost in 2008-2009 bear market. With commodities expected to turn lower, this index will also be affected unfortunately. Plus, Canada still relies heavily on US buying most of our products and natural resources.
One of my good friends and I have been following some of the most famous financial stocks like JPM and GS. In the chart above (red – Goldman Sachs, black – S&P 500), GS has been resuming its downward turn since mid October while S&P 500 has been rallying further with DJIA and Nasdaq Comp. This phenomenon also occurred with other major financial stocks like JPM and WFG, which indicates a weakness in US financial sector. Since financial is the major theme in the current bear market, I think this can qualify as a warning especially since gold and US dollar made their move already in December 2009.
In my last lost article, I believe I wrote three possible scenarios: deflationary depression, inflationary depression and bull market continuation at this time. As far as I see right now, the conditions seem ripe for a deflationary depression plus the similarities between our current condition and Japan’s in 1990 are plenty, which adds another supporting argument for a deflationary market. However, I like to add again that inflationary condition will happen after a few years when world governments effort to inflate the market will finally work once more. I guess all this is just a matter of balancing the money supply, which I don’t think can be achieved in a much subtle string of events with the way we define our currencies right now.
Safe investing,
RH
