I don’t often discuss the stock market on this site, but sometimes things have to be said.
In order to understand the market I use a few basic tools. First I use wave theory to follow trends and Fibronacci numbers to anticipate possible turn points and trend changes. In addition to this I employ time cycle recognition to see intermediate and long trends and I use sentiment indicators to help make short term decisions and predict how the market will respond to news. In addition to these tools I also apply basic principles of social psychology to understand the herd mentality.
Well some interesting things are coming to light. The rally off of the November lows is struggling to say the least. The Dow, which had risen some 22% off of its lows has fallen back and now is treading water at about 9% off the bottom. The Nasdaq 100 which had risen some 26% had also fallen but has climbed back up to near 22% above its low.
The good news is that the Nasdaq 100 has been leading the way up and down over the last several years. The bad news is that the Nasdaq 100 rally in terms of time frames and waves looks ripe for a decline. The Dow needs to climb above 8400 and stay there farily quickly and then leap above 9000 within the next couple of weeks. If the Dow does this the Nasdaq rally could hold or even gain some in a consolidation phase before the next time frame conducive to a rally wave arrives.
Yet, if over the next few days the Dow does not get a foothold above 8400, it could get real ugly real quick. In such a scenario the Dow, S&P, and the Nasdaq could fall anywhere between 25 to 40% by late spring. I totally expected the current rally which earlier peaked at 25% to get closer to 40 – 50% before the next leg down. I also did not expect the next leg down to culminate before the fall.
I am not a financial advisor or expert, but sometimes a friend can warn you of a possible storm as well as a weatherman. So many people I know have lost a lot of money either actively engaged in the market or just passively involved through their retirement plans.
Yes, there will be some breath taking rallies over the next few years, but the downswings are most likely to be even more impressive. As an example the Japanese stock market topped in 1989. Since then it has enjoyed some incredible rallies of 60% or more but currently it is still down an amazing 80% from its high. So, after almost two decades anyone holding on to stocks waiting for good times to return would still be 80% poorer than in 1989.
Could it happen here? Well, if history and mathematics are any guide the answer is not only it could happen, but it is probable.
This is how the math of rallies can be deceiving. Let’s say the Dow losses some 80% of its value like it did in the last depression. in such a scenario the Dow would go from its high of 14,200 down to 2,800 then even if the Dow rallied an amazing 140% it would still only be 6,820. Even after that tremendous rally the Dow would still be down some 52%. Let’s say after the huge rally the Dow corrects a relatively minor 30% an the Dow is back to 4800 or some 63% down from the high. This is the kind of obscene swings bear markets incur in Deflationary Depressions.
Yet, if you keep your money safe the value of your money soars in a deflationary environment. Since Japan is a land of savers the average consumer is not suffering in their economy. Even though Japan has been in a deflationary depression for almost two decades one seldom hears of any social unrest or dire circumstances in Japan. Yet, those who stayed in the stock market are much poorer than they would have been otherwise.
Jim Guido