Re: Birchtree's account talk
Four reasons to be bullish if you dare
By Jason Chow
Globe Investor magazine online, March 3, 2008
Go ahead, be bullish. Don’t worry, you won’t be the only one.
Despite the grim economic data, continued worries about the subprime-loan mess in the United States and the inability of markets to post a solid rally, a few pundits have begun lining up for the bullish side and are seeing the light at the end of the bear tunnel.
Why the cautious optimism? A few of the bullish reasons that have surfaced from the past week:
• The market moves in a five-wave cycle and the last wave is upon us.
Mark Arbeter, chief market technician at Standard & Poor’s in New York, says the markets in the United States are in the midst of a “5-wave decline” that is typical of a bearish move. And he wrote in a note last week that “we think it is possible that the fifth and final wave of the bear market is upon us.”
During this five-phase cycle, there are three successive downward waves and each are interrupted by two corrective waves that go up -- in other words, mini bear-market rallies. The rule for defining the 5-wave decline is as follows: First, wave 2– the first mini-rally – cannot retrace all of wave 1, and secondly, wave 4 cannot move above the bottom of wave 1.
According to Arbeter, the S&P 500’s first wave took it to a closing low on Nov. 26, over the course of 33 days and at a cost of 158 points out of the index, or a 10 per cent decline, to 1407. The second wave made up 109 of those points to 1516 on Dec. 16, then the markets consolidated for a few weeks before it started to break down to another decline – the third wave – for a 205-point slide. Then we saw the fourth wave, and the index went up from 1311 to 1395, starting in late January to early February. Now, we’re finally seeing this wave break down and we’re entering the final decline – the fifth wave.
Here’s the bad news: Arbeter does predict this final downward wave could force another 7 per cent to 12 per cent slide and the S&P 500 could go down all the way to the 1170-1237 range over the next three weeks. But when that’s finished, the bear will have finally run its course.
Five waves – it’s all it takes.
• The S&P/TSX composite index crossed its 50-day moving average and U.S. indices are close to doing the same. While Arbeter’s optimism is a bit far-sighted, the more excitable traders will point to a simpler yardstick to bolster their optimism: Every time a stock or index crosses its moving average, the chartists go bonkers. The 50-day moving average – calculated by the closing prices of the prior 50 trading sessions and dividing it by 50 – is a standard short-term indicator. When the day’s price crosses above the 50-day moving average, the index is trending upwards, and vice versa when it crosses below the average. Last week, the S&P/TSX composite index crossed the 50-day moving average line and the S&P 500 is inching close to doing the same despite its lackluster peformance of the past two weeks.
It’s true that the “crossover” of the index above the moving average is aided by the fact that the moving average has been depressed by the last two months of poor market performance. But that doesn’t matter -- a crossover of any kind is significant news to those who are reading charts.
• Strong commodity prices are proving the Federal Reserve’s rate cuts are working.
The U.S. markets are still lagging but David Harder, a technical analyst with RBC Dominion Securities in Toronto, says the commodity markets are proving the global recovery is on its way.
“Major increases in the price of copper, gold, oil, wheat and cost of shipping since Jan. 23 are not signs of a severe slowdown,” he wrote in a report that came out last week. “They are signs that lower interest rates are sowing seeds for a global recovery with or without the U.S.”
Harder isn’t about to say we’re in a bull market rebound yet, but he thinks this push in commodity prices is showing that the rate cuts are having the desired effect and is actually inspiring the rest of the world to pick up the slack. “While there are still some signs of a new bull market missing, the strength of global markets in the coming weeks should provide investors with more evidence to come to a conclusion.”
• The smart pundits are bullish.
According to Mark Hulbert, founder of Hulbert Financial Digest in Annandale, Va., which tracks the performance of investor newsletters, the writers of the best-performing newsletters are all optimistic about the market, while the ones who are the worst at market-timing are bearish.
In a recent column for Marketwatch.com, Hulbert took the 10 investment newsletters with the best long-term market-timing records of the past 10 years and compared them to the 10 with the worst performances. On average, the top 10 newsletters at the top are recommending a 71 per cent equity exposure for their clients. The worst 10 market timers are recommending an average -12 per cent -- the negative number means they’re recommending that readers should use 12 per cent of their portfolios to go short on the market. “This difference of 83 percentage points is one of the biggest I’ve ever seen,” he wrote. “[This] contrast bodes quite well for the stock market’s immediate term.”
To give some historical context to this measure, he points out that in March, 2003, when the markets sank and retested the October, 2002, lows and then embarked on a massive bull run for the following four years, the contrast in equity exposure was 59 per cent for the top 10 newsletters and 34 per cent for the worst. Hulbert also points out that in March, 2000, right before the internet bubble burst, the top 10 were advocating 40 per cent of their clients’ money in stocks while the worst 10 were advocating 80 per cent of their money in stocks.
“As always, of course, there are no guarantees,” he concludes. “But to believe that the market is due for a major additional decline over the intermediate term, you in effect have to bet that the newsletters with the worst market timing records will this time get it right.”
Special to The Globe and Mail
http://www.theglobeandmail.com/partners/free/globeinvestor/income/feb08/online/fourreasons.html
