A financial blog on investing in stocks, commodities and the gold bull market.
Tuesday, February 12, 2008
Secular bear markets
We've had this discussion before as to whether stocks have been in a secular bear market since 2000. The recent market action over the last 4 months makes it a little easier to accept the fact that we are in fact in a long term bear market in paper assets. In 2000 the P/E on the S&P was over 40. Today it's down to the 14-15 area. 15 is about the long term average P/E for the market. So we aren't overvalued here by any stretch of the imagination. When the market bottomed in 02 the P/E for the S&P was roughly 27 if my memory serves me. So basically at the last 4 year cycle low the market was still extremely overvalued. What's happened? Well the Fed turned on the printing presses. That liquidity flowed not only into commodities but also into corporate earnings. So the E side of P/E's has increased. Unfortunately there has been a cost for those increased earnings. Of course one of the prices we are paying is higher inflation. However that's not the only price we are paying. It was easy money that created the tech bubble. In 2002 to 2007 easy money also created the real estate bubble and the credit bubble. Bubbles aren't sustainable. We've seen the real estate bubble collapse leave a swath of destruction in its path of falling home prices, foreclosures and home owners in dire straights. Following hard on the heels of the bursting housing market we are now watching the collapse of the credit bubble with the attendant collapse in the financial sectors. The lesson of course is that there is no free lunch. The Fed was unable to "cure" the fall of the tech bubble with easy money. All they did was create two larger bubbles that are now blowing up and in the process are affecting a lot more people than the stock market bubble popping did. We are getting a front row seat as to how secular bear markets work. There is no easy way around them. There's no quick fix. As a matter of fact all the efforts to side step the bear are just making the problems bigger and badder.One thing that you can count on from the markets is that they will swing from overvalued to undervalued over long periods of time. They don't swing from overvalued to fair value and then back to overvalued. Not once in history has this been the case. So far the market has moved from extreme overvaluation in 2000 to fair value. Mostly on the back of easy money. Now that policy is coming back to bite us in the ass. The Fed's response is more easy money. It has to go somewhere. I seriously doubt we are going to make the same mistake again so quickly and reflate either the real estate or credit bubbles. No this time the money is going to go into the commodity markets. The Fed is sowing the seeds for the next leg down in the bear. That of course will be soaring inflation. Make no mistake this bear isn't going to end until stocks become extremely undervalued, just like every other time in history. We are going to have rallies that will fool everyone into thinking that the bear has been conquered but I guarantee he won't be until his work is finished. For the last 7 years the Fed has just been feeding the bear more and more food.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.