The Market Run Continues, And It is getting Scary Out There
Firstly, let's talk about what is driving this rally. The most obvious of the reason is that the decay of the economy has taper off and the damage is generally repairing itself slowly. Many S&P 500 companies announces earnings for the 1st and 2nd quarter and they generally beat expectations. This is remarkably similar to those of 2001 - 2002 days when the economy is recovering from one of the worse recession the world has ever seen. At that time, it is the dot-com bubble. Today, we have the property bubble and derivative implosion, unquestionable worse compared to the dot come. Of course the government took much more drastic measures and that is how we are able to stabilize the global economy. Interestingly, the market has another drop even with a recovering economy.
One of the main reason I am still holding back is that I am still fearful of such a scenario. the stock market recovery we had started in March 2009. Till today, the rally lasted 4 months. Based on the other 2 possible scenarios, the dot com and great depression, there is still a remarkable chance that we can go for another dip even though the economy is on the mend. Check out the GDP recovery from 2002 to 2003 and the performance of the stock market. GDP recovering yet stock market is falling.
Here is the chart of STI and the total time the first super bear rally lasted. A grand total of 6 months and a 37% jump within 6 months. The Dow took 3 months during the 1930s great depression and rallied a whooping 70% jump before tumbling 50% to another low. Now that we are extremely close to our 3-6 months target, what is worrisome is that if investors move in, they may hit a sucker rally and whatever position taken will potentially lose 20-50%. On the other hand, if the rally is real and is the start of the bull run, investors will lose out of the big initial run. The only way to decide is to assess what happened during these 2 periods and the reasons for the second crash after the initial rally.
The Common Denominator
Here are some of the common denominator of past recessions that lead to the second drop and a continuation of the bear market.
1) Collapse of a major corporation. We had Enron 2002. The biggest risk we have now is CIT bank in US, the potential 4th largest bankruptcy after Lehman and Bear Stearns.
2) Stock market ran ahead of fundamentals with hot money pouring him to chase the rally.
3) Readjustment of risk appetite after the following company quarter results are announced and did not meet higher expectation set by the market.
4) Risk of war and terrorism. We have post WWI tensions in the 1930s and the Second gulf war in 2003. Today, some of the possible flare points are Afghanistan and Korea though risk is low at the moment.
My current fear is with point 1 and 3. Let's talk about point 3 first. Most of the S&P 500 has announced their 2nd quarter results and generally, they beat expectations. The market rallied another 10% on those pieces of news since 3 weeks ago. Now that expectations are higher, companies will have a tougher time to meet the targets in 3rd quarter. The main reason for the current performance in earnings is due to cost slashing, and not due to increased sales. You can only slash that much cost and you will need increasing revenue in order to fuel future earnings growth. Right now with record high unemployment around the globe and falling consumption, sales may hard to come by and it is not hard to judge whether these companies can continue to grow their profits. When that happens, the stock market will fall.
Therefore, the following scenario may take place:
1) The market after a hard run for 2 weeks, may rest for a while. It may be flat or continue to rally until October.
2) Between now and Oct, if some major corporation collapse and during the 3rd quarter earnings remains stagnant or depreciate, the market will probably have another correction, with more seriousness. Other concerns still remains: The implosion of commercial & personal loans.
The Response to The Uncertainty
This is my greatest challenge. To move in or not to move in. My recommendation is to observe key resistance level in the Dow and S&P500.
We are currently forming a very bullish inverse head & shoulder formation for the Dow and is nearing the breakthrough or knock down phrase. Check out the details in Wikipedia . In other words, if the Dow continues to goes up above 9500, it can run another 20%, else, it may go the other way: down. Therefore, this is an extremely difficult period to bet with the market at the turning point.
The Bull run is back! Singapore GDP recovered 40%, MNC are announcing profits that are blowing away expectations, leading indicators are on a mend. Or is there another side we may not understand? Many investor are asking the million dollars question: Are we back on a bull run? Should we jump in in case we miss the boat? Are we having a second dip? Let us examine some figures that I have dug out.
Firstly, let's talk about what is driving this rally. The most obvious of the reason is that the decay of the economy has taper off and the damage is generally repairing itself slowly. Many S&P 500 companies announces earnings for the 1st and 2nd quarter and they generally beat expectations. This is remarkably similar to those of 2001 - 2002 days when the economy is recovering from one of the worse recession the world has ever seen. At that time, it is the dot-com bubble. Today, we have the property bubble and derivative implosion, unquestionable worse compared to the dot come. Of course the government took much more drastic measures and that is how we are able to stabilize the global economy. Interestingly, the market has another drop even with a recovering economy.
One of the main reason I am still holding back is that I am still fearful of such a scenario. the stock market recovery we had started in March 2009. Till today, the rally lasted 4 months. Based on the other 2 possible scenarios, the dot com and great depression, there is still a remarkable chance that we can go for another dip even though the economy is on the mend. Check out the GDP recovery from 2002 to 2003 and the performance of the stock market. GDP recovering yet stock market is falling.
Here is the chart of STI and the total time the first super bear rally lasted. A grand total of 6 months and a 37% jump within 6 months. The Dow took 3 months during the 1930s great depression and rallied a whooping 70% jump before tumbling 50% to another low. Now that we are extremely close to our 3-6 months target, what is worrisome is that if investors move in, they may hit a sucker rally and whatever position taken will potentially lose 20-50%. On the other hand, if the rally is real and is the start of the bull run, investors will lose out of the big initial run. The only way to decide is to assess what happened during these 2 periods and the reasons for the second crash after the initial rally.
The Common Denominator
Here are some of the common denominator of past recessions that lead to the second drop and a continuation of the bear market.
1) Collapse of a major corporation. We had Enron 2002. The biggest risk we have now is CIT bank in US, the potential 4th largest bankruptcy after Lehman and Bear Stearns.
2) Stock market ran ahead of fundamentals with hot money pouring him to chase the rally.
3) Readjustment of risk appetite after the following company quarter results are announced and did not meet higher expectation set by the market.
4) Risk of war and terrorism. We have post WWI tensions in the 1930s and the Second gulf war in 2003. Today, some of the possible flare points are Afghanistan and Korea though risk is low at the moment.
My current fear is with point 1 and 3. Let's talk about point 3 first. Most of the S&P 500 has announced their 2nd quarter results and generally, they beat expectations. The market rallied another 10% on those pieces of news since 3 weeks ago. Now that expectations are higher, companies will have a tougher time to meet the targets in 3rd quarter. The main reason for the current performance in earnings is due to cost slashing, and not due to increased sales. You can only slash that much cost and you will need increasing revenue in order to fuel future earnings growth. Right now with record high unemployment around the globe and falling consumption, sales may hard to come by and it is not hard to judge whether these companies can continue to grow their profits. When that happens, the stock market will fall.
Therefore, the following scenario may take place:
1) The market after a hard run for 2 weeks, may rest for a while. It may be flat or continue to rally until October.
2) Between now and Oct, if some major corporation collapse and during the 3rd quarter earnings remains stagnant or depreciate, the market will probably have another correction, with more seriousness. Other concerns still remains: The implosion of commercial & personal loans.
The Response to The Uncertainty
This is my greatest challenge. To move in or not to move in. My recommendation is to observe key resistance level in the Dow and S&P500.
We are currently forming a very bullish inverse head & shoulder formation for the Dow and is nearing the breakthrough or knock down phrase. Check out the details in Wikipedia . In other words, if the Dow continues to goes up above 9500, it can run another 20%, else, it may go the other way: down. Therefore, this is an extremely difficult period to bet with the market at the turning point.
My action plan is as follows:
- If Dow goes above 9500, I will move into a 60 equity 40 bond portfolio. The 40% bonds is to prepare for any uncertainty that will occur in this period. We will watch like a hawk for the October period. Take some profits off the table.
- If Dow hits down, we watch the show and hopefully, catch the bottom before it goes up again. The first Target will be at Dow 8000
-For CPF, with the lack of available funds and the possibility of an overheated China stock market, I prefer Aberdeen Pacific. For Cash, a combination of Aberdeen and BRIC will be a good strategy.
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