I would hate to disappoint them but the bear is far from dead. Playing dead is one of his favourite tricks. The bear so far has wreaked a high degree of devastation. The recent lows on the Dow Jones Industrials dropped it to the 1998 lows. Ditto for the TSX Composite. Elsewhere it was even worse. Both the S&P 500 and the broad based Russell 3000 fell back to levels last seen 1997. Anywhere from 4 to 5 years of gains wiped out. And in total almost $8 trillion (US$).
Predictably some panic had started to set in as withdrawals from mutual funds have heightened over the past few months peaking with the sharp drop in July. With the big American funds stuffed full of the big names like GE, JPM, C, MO, JNJ and FNM, companies that are the crème de la crème, they never seemed to break. Well they did and the huge Fidelity Magellan Fund rolled over and sank 30%.
But now we are seeing articles touting that valuations are at great levels, the best in years, now is the time to buy, and you will never get a better chance. The corporate corruption is known and behind us; measures are being taken to correct it in the future; the economy is growing albeit grudgingly; there is no sign of any inflation; the Fed stands prepared to provide the system with the liquidity needed to grow; major problems such as a possible Brazil meltdown are being met; each move up in the market is broad based. We could go on.
But nobody wants to focus on the debt. While consumer confidence has been waning, credit card debt, auto loans and other personal borrowing still jumped $8.4 billion in the US in June following a $9.5 billion rise in May. Zero percent car loans seem to be everywhere right now. The housing boom has started to slow and we noted that sales even here in Toronto plunged sharply last month. We suspect that housing prices have peaked and will soon start coming down to more realistic levels. Still numerous pundits said there would be no double dip. Unfortunately even in most of the other recessions over the past 30 years there has been a double dip. The first phase of this one was triggered by the collapse in the technology and telecommunications sector followed by the terrorist attacks. The second phase will be the real collapse that will be consumer driven and include consumer, corporate and country debt defaults.
Speaking of debt defaults, a possible collapse in Brazil was staved off by the announcement that the IMF would provide $30 billion. Brazil was at risk of default of in excess of $250 billion of external debt. After the collapse in Argentina this would be bigger and put other Latin American countries at extreme risk. It would also threaten major US banks. On the surface at least the Brazil bailout stems the problem. But an IMF bailout is a two edged sword as quite usually the requirements of the IMF fall on the backs of the people. Argentina had considerable problems with the terms of the IMF bailout and faced serious social unrest as a result. Effectively these IMF bailouts help protect the foreign debtors (largely the huge US money banks) while putting the people at serious risk many of whom may lose their life savings or their jobs. Despite the proposed IMF bailout there is no guarantee that Brazil will be able to save itself or it won't implode with serious social unrest.
The rally back since July 24, 2002 has been very impressive. Indeed it should go a bit further here. The first run up took us to just above the 20-day moving average. We are now breaking higher. The next key moving average is the 50-day moving average. That is up at 950 S&P 500, 1400 on the NASDAQ, 7000 TSX, and 9000 Dow Jones Industrials. These levels we suspect will be seen this upcoming week. The Dow could reach as high as 9400 and the S&P 500 to 970. But given that fundamentally nothing has changed and despite the desires and wishes of many pundits that the economy will not slip into a double dip recession we also suspect that the rally that began with a furor on July 24, 2002 could be over as quickly as it began.
We have noted before and we will re-emphasize. A secular bear market does not end with bang, a reversal and a raging rally. Real secular long-term bear markets end quietly with almost nary a bull to be found. This has instead all the characteristics of a powerful bear market rally. New bullish prognostications, numerous claims of value, economy holding together etc. are keys that the market as down as it was on July 24, 2002 has now suddenly decided that everything is rosy once again. Reaching key technical levels as it quickly as it will this upcoming week says that it will also fail almost as fast as it began. Many of the technical indicators that were oversold will have been relieved..
But nothing has really changed. The scandals are still there, the threat of war or another terrorist attack is still there. The overvaluations are still there. One recent study we read said the Dow Jones was fairly valued at 4400. This is consistent with many others we have seen. Of course in a real secular bear market it will overshoot that level. We still have targets down to as low as 2400/3000. Robert Prechter of Elliot Wave International is predicting an eventual fall on the Dow Jones Industrials to under 1000. By comparison I feel like a raging bull. Levels of 6400 could be seen in the upcoming weeks. These are levels that would make sense given a rapid rally that reaches levels mentioned above this upcoming week..
There are only two areas we feel quite comfortable with at this stage. That is golds and oils. Oils because of the ongoing threat of war in the mid-east and Central Asia. Gold because as the US Dollar continues to collapse, gold, priced in US$ will go up. Gold also benefits as debt is repudiated and war breaks out. Finally gold will benefit from the ongoing flight to the safety for a hard asset that has no liabilities. Both these commodities are currently in long term secular uptrends but may suffer periodic bull corrections such as we witnessed recently. The prime area we would avoid is banks and financial institutions because of the ongoing threat of debt collapse.
So is a bottom in? Not with this rally that is clearly moving too fast too quickly. Oh sure we could hit the 50 day moving averages this upcoming week and if the pullback does not do too much damage then there is a real chance we could move to the next levels towards the 200 day moving average. Arguing for a possible top this upcoming week is the 20th anniversary of the bottom made August 9, 1982. Some charts are exhibiting a possible head and shoulders bottom pattern (see Dow Jones Industrial chart) that would suggest the 200-day moving average or higher as a target. If the H&S pattern is correct that we would carry on until September with the possibility of top on or around September 11. If the H&S pattern fails then the top will come no later than around mid next week.
Ultimately though nothing supports a long-term bottom in just yet. Remember that just as the bull market in the latter half of the nineties displayed no logic so to will the bear market of the first decade of the 21st century. It will just keep going until it wipes out all of the gains of the previous bull market just as secular bear markets have done before.
August 12, 2002
Charts and technical commentary by David Chapman of Union Securities Ltd. 69 Yonge Street, Suite 600, Toronto, Ontario, M5E 1K3 (416) 604-0533, (416) 604-0557 (fax) 1-888-298-7405 (toll free) email david@davidchapman.com
The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. Neither David Chapman nor Union Securities Ltd. take responsibility for errors or omissions which may be contained therein, nor accept responsibility for losses arising from any use or reliance on this report or its contents. Neither the information nor any opinion expressed constitutes a solicitation for the sale or purchase of securities. Union Securities Ltd. may act as a financial advisor and/or underwriter for certain of the corporations mentioned and may receive remuneration from them. David Chapman and Union Securities Ltd. and its respective officers or directors may acquire from time to time the securities mentioned herein as principal or agent. Union Securities Ltd. is an independent investment dealer and is a member of the Toronto Stock Exchange, the Canadian Venture Exchange, the Investment Dealers Association and the Canadian Investor Protection Fund.