Opening Position
January 2009
When a market is as bearish as it was in 2008, you are tempted to parade technical analysis in front of all the fundamental analysts who swear by the buy & hold strategy, or encourage people to start accumulating stocks or mutual funds now while they are relatively cheap. But does “relatively cheap” valuation mean the bear market is over? Every time I look at my charts after I hear someone mention “capitulation” or “time to buy,” all I see is a market that is trending down. And the idea of buying is far, far away from my mind.
While it is true that you may find some good values or bargains, as long as that trend is pointing down, it is likely that what you are doing is trying to catch a falling knife. What I see now (mind you, I’m writing this toward the end of November 2008) are markets that are very close to a significant support level, which, if it breaks to the downside, could be very ugly. It could be so ugly that I am not even going to say how far the broad markets could go down. Right now, I’m just hanging on to the edge of my seat watching the markets to see if that support level breaks or holds. At the same time, I’m listening to the talking heads on TV talking about a turnaround or a capitulation, or that there is always a bull market somewhere.
Setting aside technical analysis, which most from the fundamental camp consider voodoo, the economic fundamentals are far from rosy. We have had a housing collapse, a crisis in the financial markets, a recession, a collapse in the auto industry, high unemployment — and who knows what is still to come. All leading economic indicators are pointing down, just like the markets are.
In fact, according to Marketwatch.com, in just over one year (October 2007–November 2008), the Standard & Poor’s would have lost more than $6.69 trillion in market cap. Think of how long that will take to recover. What is unfortunate is I think that amount will increase in the near term. I think that’s because there are a lot of hedge funds out there that need to liquidate their assets, and I can foresee that selloff being more than $500 billion.
By the time you read this, most of these issues would have already taken place and we may have a more concrete idea of what to expect in the near future. But one thing I’m certain of is that the economy still will be in bad shape. It will take a long time to heal this economy. But the bear market may be over well before the economy recovers. The charts will tell you when the bear market is over. Keep watching them, because they don’t lie.
Jayanthi Gopalakrishnan,
Editor