When in Doubt - act on the Technicals
There is so much conflicting data, there are
so many conflicting opinions out there. The hopes and the
fears and information and misinformation are intense. But
any thinking investor knows that the nastiest of gadgets are
still out there -- as well as the willingness of nations and
terrorists to use them. And he/senses that the global economy
is in trouble. And if in doubt he/she'll have a look at the
technical evidence when nicely confused by the fundamental
evidence.
On the one side there are those hopeful bullies
who say the worst is over for the markets now that some of
the risks in Iraq are out of the way. They say that US efforts
to stimulate their economy with lower interest rates and efforts
to bring the oil price lower -- must lead to a recovery of
multinational corporate earnings, then a recovery of global
demand. The bullies think that most of the recent negativity
and pessimism has been centred around war risks and related
uncertainty. They believe that the risks of Saddam using his
nasties from an underground hideout to destabilise the Middle
East further or the risk of the war extending to Syria and
Iran are very low. They believe that North Korea will back
off and that China and Pakistan are not opportunistic warmongers.
Most important, they believe that the U.S. can deal with its
massive debt burden and costs, assuming more successes in
dealing with terrorism and related supporters. They believe
that US bonds, property and stock market prices will remain
mostly stable and that the US$ is not about to collapse. They
do not expect either intense deflation nor intense inflation
to accelerate in the next two or three years. They hope that
European and Asian economic growth will revive. They expect
that while SARS will further burden the tourism and transport
sectors, both the superbug and terrorism will be beaten.
Although these bullies acknowledge the risks,
they are still mostly in denial and want to buy stock market
"value" -- expecting either an investable recovery
for at least a few months or a new bull market.
On the other side, those who are neither perennial
bulls nor perennial bears -- look at the evidence and are
only partly in denial. The picture they see is bad, but not
terrifying. They don't want to look too much in case it gets
terrifying.
The US which has propped up the global economy
since 1998, is in a credit bubble, bigger than ever before,
in a slowing growth environment. The US is carrying the cost
of acting as the world's policeman. The two and four-year
trends of the Dow Jones Industrial Average and the US$ Index
are down -- with behavioural counts indicating high probability
statistical scope for aggressive more downside [70% + and
35% respectively] perhaps in the next two years.
Long-term market cycle evidence shows scope
for the bear to continue to 2008 or 2012 or beyond -- accepting
of course that like Japan since 1989, there will be investable
rallies along the way. US residential and commercial property
demand is already under pressure -- and many Americans are
beginning to realise that their usual pattern of spending
on credit in bad times cannot be sustained - while unemployment
increases and corporate earnings growth slows.
Yes, most of them are hoping that the bullies
are right and that within months, revived real economic growth
and revived global demand will make the last six months look
like a bad dream. The realistic bears are closer than the
bullies to accepting economic reality -- and they want to
position accordingly. They look at the many negative what-if
scenarios out there - and their potential impact, a bit more
closely than the bullies do. The realist bears appreciate
that the biggest risk is that when remaining confidence foundations
fail, for whatever reason, massive Asian and Middle Eastern
disinvestment, followed by some European disinvestment from
US bonds and stocks and property would be accompanied by perhaps
the biggest global depression in history.
The clinchers as far as I'm concerned are the
long-term technical trends and counts. One way.
Fundamentally, it is also important that in
the current deteriorating earnings and economic environment,
during a period of huge geopolitical risks, many leading Wall
Street companies are still showing price-earnings ratios of
above 30, depending on how you value stock options [an alternative
more conservative valuation of stock options suggests that
the real p/e's may be well above 40]. Intense and extended
bear markets usually end on p/e's of 10 or lower. The inflated
p/e's tell me that the majority of investors are still in
denial about the financial meltdown coming. Whether it comes
as a dump or as stagnancy - both scenarios have a pretty debilitating
effect on a typical "value" investing strategy.
But if you don't like the fundamental arguments,
rather rely on the technicals which reflect what the markets
are doing - rather than what one expects the markets to do.
Right now, the macro dynamics confirm that a young bear, not
an elderly bear stands before us.
Also note that while market participants are
in denial, investors who look at markets as a behavioural
model know that the bear is young. Experience shows that only
after capitulation with a "dump at any price" mindset
- or years of insidious creeping negativity and disillusionment
with stocks and other paper assets -- followed by upward price
trend development - while all about you are in doom and gloom
- does the bear expire. Technicals are a good way of measuring
the behavioural factors.
So what does all this mean for the average investor?
That rally days and pause days should be used to structure
defensively or to make cash to the extent not done already.
Don't just hope for the best. And don't hope to dump on collapse
days. That gets very expensive. Recovery from this bear may
take a long time and for most market sectors can be from much
lower levels. A ride- it- out strategy will be very expensive
when measured against opportunity cost.
Structure defensively by
investing in funds which protect against currency risk, guarantee
capital and in some cases guarantee returns -- such as a well-managed
hedge fund which can make money for you on the way down in
a bear market and will trade technical ranges in a stagnant
market and will buy pushes and go long during recovery phases
and will diversify to invest the technical not only fundamental
trends.
Buy some gold shares, preferably investing in
mining companies which are unhedged, now offering excellent
value and technical range. The $Gold price and Comex volumes
are showing strong enough medium and long term buy signals
and the US$ is corroborating. I've talked about this at length
before and I maintain the view that the current and more gold
price dips are buying opportunities for the medium and long
term investor, especially now that many gold shares are at
near to their 2002 lows. Gold shares are not just for trading
- now that the 18-21 year cyclical gold bull is underway.
History shows that both in times of intense deflation and
inflation -- there is a flight to gold.
A $Gold price above $500 by end of 2004 is feasible
on behavioural counts. It is not important to anticipate the
exact triggers, shocks and degrees of vulnerability to the
global financial system. Action in coming weeks above $337.50
will get the technical traders excited and action below $319.20
could set up delay or reversal. Right now at $335.50, the
Gold price is looking good to traders. At $348.00 - accelerating
prices could just signal another phase of the gold rush that
started in 2000.
One of the best indicators that a shock to the
global financial system is underway will be a plummeting US$
and a rocketing $Gold price. Currencies and bonds are only
as good as their promises and their promises are only as good
as their nations' debt and growth. As Bill Murphy of the Gold
Antitrust Action Committee at www.leMetropoleCafe.com so dramatically
quotes: "Paper money eventually returns to its intrinsic
value -- zero." Voltaire (1694-1778). Maybe mankind's
confidence has evolved a bit since Voltaire's times -- but
in essence he was right.
One of the best indicators that a shock to the
global financial system is underway will be a plummeting US$
and a rocketing $Gold price. Currencies and bonds are only
as good as their promises and their promises are only as good
as their nations' debt and growth. As Bill Murphy of the Gold
Antitrust Action Committee at www.leMetropoleCafe.com so dramatically
quotes: "Paper money eventually returns to its intrinsic
value -- zero." Voltaire (1694-1778). Maybe mankind's
confidence has evolved a bit since Voltaire's times -- but
in essence he was right.
When Rand buying of recent times slows or reverses,
there will be excellent opportunities in resources and other
companies which rely on a major portion of their earnings
from outside of South Africa. We analyse the Rand's short
and long term and key levels and the US$. We analyse targets
and timing in detail in our Turning Point newsletter, the
next issue of which is being prepared right now and will be
ready by 24th April.
Also have another look at your Pension Fund,
Retirement Annuity, Life Assurance, Endowment Fund, Unit Trust
or other long-term savings plans. Very often these are beautifully
diversified but are invested in preponderantly underperforming
or negatively performing asset classes and market sectors.
Very often they rely for performance on the next rally or
bull market. Very often, their linkage can be switched as
part of a defensive strategy - with excellent results when
measured over the long-term.
But make sure to get the right advice on sector
trends and asset class allocations. No more the days when
journalists and the securities industry should persuade that
a ride- it- out approach works best - while waiting for the
next bull market.
Best Regards,
Victor Hugo
www.HugoCapital.com
www.saGolds.com
www.GOLDSignals.com
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