Are We At The Market Bottom Yet? The Next 6 Months Will Tell
It seems that it is not only the recent Olympics that we have seen many new records broken, the financial market has broken a couple of records too. The steepest one week drop in history when the Dow lost 20% in a week. The greatest one day jump of 11% in 75 years. So, are we at the bottom at last?
Praying For A Bottom
So, with the 11% jump and a reversal of global stock market, people are asking: Are we finally at a turning point yet. There is no real answer. Share prices is bound to rally spectacularly after such a steep drop, but by no means we are at the clearly at the turning point of another bull run. We have been cautiously bearish until Friday's approval of the bailout and the resultant market reaction. Prior to 3 months ago, we were still positive about emerging market equities given the limited exposure to sub prime. Now, we change my view from avoid all risk except Asia to avoid all risk. Some of the factors that point to the worsening of the impact of the credit crunch includes a contraction of consumer spending, the first since the Great Depression and the highest unemployment rate since 2003. Small and big businesses in US is unable to access to their credit lines to manage their cash flow due to the reluctance of banks to lend and we are seeing small and medium companies: the backbone of the economy turning belly up.
Previously, the sub prime is only limited to banks and financial institutions. The poison is spreading faster and further than thought possible. So far, we have only heard of big financial institutions getting into trouble. But now, we are seeing non financial related industries being adversely impacted. A benchmark of the market not falling below 10,000 points for the Dow, will probably lead to a mild recession. With Dow below 10,000, we are looking at a potential drop of another 30% drop to 6,000.
Praying For A Bottom
So, with the 11% jump and a reversal of global stock market, people are asking: Are we finally at a turning point yet. There is no real answer. Share prices is bound to rally spectacularly after such a steep drop, but by no means we are at the clearly at the turning point of another bull run. We have been cautiously bearish until Friday's approval of the bailout and the resultant market reaction. Prior to 3 months ago, we were still positive about emerging market equities given the limited exposure to sub prime. Now, we change my view from avoid all risk except Asia to avoid all risk. Some of the factors that point to the worsening of the impact of the credit crunch includes a contraction of consumer spending, the first since the Great Depression and the highest unemployment rate since 2003. Small and big businesses in US is unable to access to their credit lines to manage their cash flow due to the reluctance of banks to lend and we are seeing small and medium companies: the backbone of the economy turning belly up.
Previously, the sub prime is only limited to banks and financial institutions. The poison is spreading faster and further than thought possible. So far, we have only heard of big financial institutions getting into trouble. But now, we are seeing non financial related industries being adversely impacted. A benchmark of the market not falling below 10,000 points for the Dow, will probably lead to a mild recession. With Dow below 10,000, we are looking at a potential drop of another 30% drop to 6,000.
Scenario 1: At The Bottom
The best case scenario. The market is at the bottom, stabilizes between Dow 7,000 to 10,000 points. By no means the market will have a V shape recovery judging that the toxin has spread to non-financial institution. Even with the freeing of credit, the market will take at least another 2 more quarters to get back into shape again. The 11% rally will just be part of a bear market rally. Reason: because there are still sellers who are waiting to get out but are trapped in the 20% plunge last week. They will attempt to cut loss and sell into any rally. This process will go on for at least 2 quarters until the sellers are all exhausted. Than a base for the bull market can be formed.The strategy for this process is simple. Every time the dow hits between 7500 and 8500, we will move 10-20% of the funds back in from cash to banking and emerging market stock.
Scenario 2: The Worst Recession Since The Great Depression
The worse case scenario. Many believed that this recession is definitely more serious than that during the dot com bubble days. The greatest fear is that we are only at the edge of the iceberg. By all means, if the potential recession is worse than that of dot com, the market has a high probability of dropping below that of the previous bottom. In that case, Dow 5,000 to 6,000 is a possibility.The Rationale of Holding Cash
Simply put, the market will either stabilize or get worse. Therefore, holding cash and sovereign bonds will be the best strategy for now. During the great depression, blue chip stocks lost 90% of their value. That is the kind of benchmark we should take note should the market really turn for the worse. On the positive side, the current environment is no way like the Great Depression days. During the Great Depression: GDP fell 30%, unemployment exceeded 20%, inflation dropped 33%. Therefore, there is a need to be on the caution side rather than being too optimistic or pessimistic.
Simply put, the market will either stabilize or get worse. Therefore, holding cash and sovereign bonds will be the best strategy for now. During the great depression, blue chip stocks lost 90% of their value. That is the kind of benchmark we should take note should the market really turn for the worse. On the positive side, the current environment is no way like the Great Depression days. During the Great Depression: GDP fell 30%, unemployment exceeded 20%, inflation dropped 33%. Therefore, there is a need to be on the caution side rather than being too optimistic or pessimistic.
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