The next few weeks will be critical to the US market. The S&P500 could go either way. We can see from the following chart that, despite the recent strong rally in the Dow to 10,000 and the S&P500 to 1100, the market is still in a downtrend. This condition will be challenged in coming weeks. The market has been celebrating the positive earnings recovery, though one has to acknowledge several things:
1. Tight credit conditions
2. Continued job losses
3. Prospect of inflation
4. The role of government stimulus in preserving economic activity
For this reason I am expecting US equities to fall in coming weeks. One might wonder however if this gloomy forecast is premature. Afterall the US can keep printing money, so until the day when inflation undermines the impact of further stimulus, the US Fed can support the equity market for a time yet. The market might however see it another way, so this is good reason for a pause. This also adds to the allure of gold.
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Andrew Sheldon
www.sheldonthinks.com
Looking at the US market it is apparent that despite the recent rally in the S&P500 from 670 to 1078 between March and September 2009, the market is still in a downtrend. The implication is that the market tanked when its downtrend was being challenged. The question therefore becomes - how low will it fall? I am expecting a fall back to the 942 support level, then consolidation from that point.
I would not be surprised to see the S&P500 return to its lows of 670, however that will not occur for some time yet.. 12-18 months as I believe the motivation for that move will be the prospect of higher interest rates to fight inflation. This will all be conjecture to cynics who need to experience things first hand before they believe.
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Andrew Sheldon
www.sheldonthinks.com
The Nikkei-225 broke resistance on Monday and has continued to fall during the week. This is of course another downtrend in global equity markets. The question is how low will it fall? We see the most likely support levels as 9,065 (interim) and 6,850. The possibility of the market falling to 6,850 is pretty dire. But that is what happens when people are fearful of the future, and are unable to spend because they are concerned about losing their job or face ever-tightening rises in interest rates.
It will be hard for market pundits to appreciate but the worst has yet to come. The recovery in the stockmarket was of course the result of government stimulus. There is talk that the property market is about to recover as well. We do not believe that at all. We think there are safe places to buy, but cities and tourist meccas are not among them, and will not be for several years yet.
Much will depend on whether government continues spending. It seems impossible because of the damage they are doing to the underlying economy. Stimulus absorbs underlying lack in market capacity by stimulating demand, but in as much as governments don't constitute 'productive' capacity, the implication is that they do not create wealth. They simply redistriiute money, which means they are inflationary. Right now they are among the few spending money. The greater share of the economy they represent, the more protracted the slump. The implication is that we are either going to see failures or have a long drawn-out recession like Japan. I would suggest its going to be some compromise between collapses and protracted recession. i.e. We are looking at selective intervention.
For the reasons above I sold a position I had in KDDI last Friday before their was considerable carnage this week.
Investment Strategy
If you are investing for the long term, you still need an investment strategy. Dont be fooled by the rhetoric of fund managers. The reason they advise you to 'buy & hold' is because they dont want to compete with you in sell-offs. Markets and industrial sectors are cyclical, so they demand trading to get the best returns. Fund managers actually cant hope to match the performance of small investors (if you are half good) because they have to manage huge amounts of funds and charge you a fee besides.
MY ADVICE is (i) look at a range of market indices and decide upon what level of correction would give you the justification you need to get in & out of the market. It might be a 5-10% retracement or a break of trend. (ii) Diversify if you dont have an intimate knowledge of the company or management. More than 30% in one company is aggressive.
The next few weeks will be critical to the US market. The S&P500 could go either way. We can see from the following chart that, despite the recent strong rally in the Dow to 10,000 and the S&P500 to 1100, the market is still in a downtrend. This condition will be challenged in coming weeks. The market has been celebrating the positive earnings recovery, though one has to acknowledge several things:
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