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Global Markets Take a Turn for the Worse

May 8, 1998

"Indonesia's financial markets plummeted for a second straight day, contributing to sharp declines in stocks around Asia, as unrest escalated in at least four Indonesian cities following fuel-price increases mandated by the International Monetary Fund." So began an article in the May 7 Wall Street Journal.

Asian markets, having recently been granted a respite from the tortuous market declines that have devastated their collective economies since last summer, are now falling back into recession. Stock markets, led by Japan's Nikkei index and Hong Kong's Hang Seng, have experienced precipitous declines over the past few days. The Nikkei, having recently experienced a bear market "correction," is now poised to penetrate the 15,000 point mark—an extremely significant benchmark, and one that could send Japan and all of Asia (an in turn the global economy) into a tailspin. As of this writing (Thursday, May 7), the Nikkei was at 15,142 and had fallen over 500 points over a three-day period. The Hang Seng index was at 9971 and also coming off a recent series of declines. The Jakarta Stock Exchange index, meanwhile, dropped 4.7% to its lowest level since mid-January. In Malaysia, Kuala Lumpur's main index sank 3.9%, accompanied by drops of 2.5% in the Philippine capital of Manila, 1.8% in the Thai capital, and 1.4% in Singapore.

Civil unrest has suffused throughout Asia in the past several days. Students at college campuses in Indonesia recently clashed with police in violent protests. Looting and burning of Chinese-owned shops is also common there. Much of this unrest and civil uprising is due to dissatisfaction over political leadership and over IMF mandates. Clearly, the worst lies ahead for these Asian countries.

In the May issue of The Economic Outlook, editor Mike Haga pointed out that Japan's slumping corporate profits portend another leg downward in the country's long-term bear market. Alex Kinmont, a strategist at Morgan Stanley, expects manufacturing profits in Japan to fall by 30% during the current financial year, and those of non-manufacturers by 20%, although even this forecast may be optimistic. Haga pointed out that the country's bloated construction industry, which employs 11% of the workforce, faces the greatest danger as a recent construction boom has led to over-building and a crashing real-estate market.

Significantly, the leading market indices in the U.S. appear to have registered tops, though it is too early to tell with assurance. The Dow has experienced a recent bout of declines, falling nearly 300 points in three days, just before registering an intra-day all-time high at 9261. It now stands at 8976. Breadth on the NYSE and NASDAQ exchanges has deteriorated markedly over the past couple of weeks, but losses continue to be modest, leading us to believe there remains some strength and near-term bullishness. That recent declines have been of a moderate, controlled nature provides further credence to this scenario.

The extreme point declines and bearish tenor that have preceded more recent sell-offs (most notably the mini-crash of Oct. 27) have been missing from this correction. We doubt very seriously that this marks the beginning of the expected grand mal sell-off. Instead, we see it as a reflection of investor hesitancy after the extreme run-up of the Dow over the past three months. Volume on the NYSE over the past few days has contracted somewhat, an indication that some market participants are on the sidelines waiting for a signal to step back in the market.

Nevertheless, the Dow has broken out of a three-month consolidation period to arrive at new highs and its chart gives every indication of a nearly topped-out market. The Dow's stochastics chart is also pointing downward. It would indeed be surprising if the Dow could muster another major bullish advance, though a series of minor advances would not surprise us.

Of greater interest at the moment is the Dow Jones Transportation index. The transports look very much to have "topped out," and appear to be in the early stages of a bearish decline. As of this writing, the transports had broken out of a long-term upward trend channel and were poised to break the next closest support level at 3400. The stochastics for the DJ Transportation index point to further weakness in the near future.

Utilities also have the look of an index in decline, having recently established a downward trend within clearly delineated channel lines. Together, these two indices provide confirmation that the larger trend has already turned from bullish to bearish. The Dow should not be too far behind.

Stock market maven David Tice, editor of Behind the Numbers newsletter and manager of the Prudent Bear Fund, aptly described the market's recent showing in a recent newsletter: "Considering today's troubling fundamentals with an overheated economy, a supposedly nervous Fed, declining corporate profits, and an Asian economic and financial crisis that is much more problematic for global profits than is currently appreciated, we see the underpinnings for a significant stock market sell-off developing at any time. Interestingly, surging imports and a widening trade deficit were at the top of the list of market concerns leading to the stock market crash in 1987.

"Today we see similar developments but, because of the extraordinary and unhealthy circumstances globally, markets are not worried about the health of the dollar and surging interest rates. This complacency, however, is unjustified as the combination of declining profits and a massive asset bubble make for a dangerous mix; a mix certain to lead to considerable market instability and inevitable decline. While the bulls today celebrate the minimal existence of consumer inflation, the true danger is asset inflation and a stock market boom destined for bust."

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit

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