OPENING POSITION
September 2003
Everyone knows now what it is like to go through a crisis in the financial markets, but what makes them happen? And how do you know when the crisis is really over? For examining what's behind the drastic ups and downs in the markets, there's no better piece of literature than Manias, Panics, And Crashes: A History Of Financial Crises by Charles Kindleberger. The book contains an analysis of financial crises since before the South Sea bubble in the 18th century, up to the East Asian crisis in the late 1990s. After reading this book you'll understand that manias, panics, and crashes are not uncommon. Each major upswing and crisis has a common thread. In my opinion, Manias, Panics, And Crashes should be required reading for anyone who has any interest in the financial markets.
Charles Kindleberger died on July 7, 2003, at the age of 92. His name will always be remembered in the financial community. Although we will not know Kindleberger's thoughts on the dotcom bubble and the crash that followed it, his contributions give us insight to its causes. Kindleberger states that markets are generally rational but that sometimes external shocks initiate a mania, which in the most recent case was innovation. The big question now: Have the excesses of the bubble been erased? There's no evidence of it so far. Although the recession has been declared to be officially over, the current US federal deficit is likely to be above $400 billion in fiscal 2003, short-term interest rates have declined to 1%, long-term bond yields are low, and household debt continues to rise.
For good reason, everyone is anxiously awaiting a long-term upward trend that will provide plenty of trading opportunities. This is why trends such as the one that started in March of this year had so many traders hopping on board who hoped to make up for their losses, if nothing else. When you see such a trend begin to form, you want to identify it in its early stages, jump in, and be ready to exit if it shows signs of reversing. One indicator you can use for this is the index of chart sentiment, which was developed by Viktor Likhovidov; see page 18 for details. Another useful indicator is the classic MACD (moving average convergence/divergence), and this month we interviewed its founder, Gerald Appel. Read about his thoughts on the market and how to effectively trade them starting on page 84.
It takes time to recover from a market bubble, and although we will not hear the trusted and experienced views of Kindleberger, his insights into past bubbles can give us an idea of how long the recovery period may last before a rally is here to stay.
Jayanthi Gopalakrishnan,
Editor
Originally published in the September 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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