World Stock Markets 2010

[No6]

Apparently, on average we should expect at least 3, 5% declines and at least 1, 10%+ fall every year.

 

I believe the rally will continue. The recent slump, in my view, was normal. The U.S. stock market historically has averaged at least three declines a year of 5 percent or more, and one fall of 10 percent or more, according to Ned Davis Research Inc. I think the rally will resume and run -- with unpleasant interruptions, to be sure -- through most of 2010, and possibly longer.

 

Ned Davis, head of NDR, is one of my favorite analysts. His firm predicts a decline, perhaps even a “mini bear market,” during the second and third quarters. It expects the market to advance again after that.

 

The Ned Davis team recommends that investors go “defensive” during that six-month stretch by buying the kinds of stocks that usually hold up better in declining markets: consumer staples, health care, utilities and telecommunications stocks.

 

The Davis folks have given those four groups the acronym SHUT (staples, health, utilities, telecom). When the SHUT stocks break above their 200-day moving average, they say, investors should climb onboard.

 

Saw-Tooth Advance

 

Although I respect Davis, I’m not about to play defense. I don’t think the year will divide, like a concerto, into three distinct movements: up, down, up.

 

Rather, I think the market will move in saw-tooth fashion, up and down all year, but with more ups than downs. Accordingly, I am staying with my “offensive” stocks: materials, energy, and industrial companies.

 

==============================

 

Second-Stage Bull

 

During most bull markets, the first 40 percent or so of stock market gains occur in a spurt before an economic recovery begins. This time, that would be the period from March through, say, September.

 

The remaining 60 percent of the gains usually occur more gradually and haltingly during the next year or two, as the economic recovery unfolds.

 

Energy stocks usually do pretty well during the second stage of bull-market advances. Today, there are lots of energy companies I like.

 

http://www.bloomberg.com/apps/news?pid=206...id=aPkRyJG9weGQ

[littledavesab]

Apparently, on average we should expect at least 3, 5% declines and at least 1, 10%+ fall every year.

 

"Standard deviation" ?? - often written about bu this fella

see link for chart

 

http://www.investorschronicle.co.uk/Market...s-tail-risk.jsp

 

Bond risk as tail risk

Created: 1 February 2010 Written by: Chris Dillow

It's commonly claimed that a big threat to equities this year is that the market might be depressed if gilt yields rise sharply. This claim, however, runs into a problem; history shows that rising gilt yields are only rarely a problem for shares.

 

My chart hints at this. It shows annual changes in the All-Share index (in per cent) and in 10-year gilt yields (in percentage points). If rising gilt yields often caused shares to fall, we'd expect to see high points on the pink line associated with low points on the blue line. But there are very few of these. Yes, in 1994 a rise in gilt yields was associated with a weak stock market. But recently - such as last year - rising gilt yields have been accompanied by rising share prices.

 

 

 

Over the post-1986 period as a whole, the correlation between annual changes in gilt yields and in the All-Share has been a mere minus 0.14, with changes in gilt yields explaining a mere 2 per cent of the variation in equity returns.

 

If we control for changes in Bank rate, the relationship is stronger, but not much so. Holding Bank rate constant implies that a two standard deviation rise in gilt yields - roughly a one-in-50 chance statistically speaking - is associated with equity returns being only half a standard deviation below average - that's only nine percentage points.

 

The message seems clear. Rises in gilt yields are, on average, only slightly bad for equities. The biggest shocks to shares have not come from the gilt market.

 

There's a simple reason for this. Many of the things that are bad for gilts are good for shares. If investors become more willing to take risks or (a similar thing) if they anticipate stronger economic growth, they will sell gilts - but shares will do well. This is what happened last year.

 

So, how can a rise in gilt yields hurt equities?

 

One possibility, which I discuss elsewhere, is inflation. If gilt yields rise because investors anticipate higher inflation, equities might well suffer because inflation is bad for both assets.

 

This danger, however, is mitigated by the fact that gilts are already pricing in a lot of bad inflation news. The breakeven inflation rate for 14-year bonds is 3.3 percentage points. That implies that the market either expects the inflation target to be significantly overshot, or believes there is a large danger that it might be.

 

A second possibility lies in pure time preference. If investors were to want their cashflows in the near rather than distant future, they would sell both longer-dated gilts and equities. Although this possibility gets no attention, it is theoretically important.

 

But, of course, those who talk about the danger of a gilt sell-off generally mean something else; the danger of a downgrade to the UK government's AAA credit rating.

 

However, a mild downgrade in itself needn't be a big problem for gilts, let alone equities. Last year, Standard and Poor's downgraded Spanish government debt from AAA to AA+. But Spain's 10-year bonds yield a mere 0.15 percentage points more than UK ones. Yes, this is because Spanish yields are tied to French and German ones by the fact that, as a member of the eurozone, Spain cannot easily devalue its currency. But this only shows the point - that small differences in credit ratings are trivial compared with currency risk.

 

That said, a more serious downgrade would be a problem. It's no accident that the stock market in Greece - whose government has a mere BBB+ rating - has been one of the world's worst performers recently.

 

But the danger of the UK getting into Greek-style trouble is tiny (at least in the next few months).

 

Which raises a question: could it be that those who worry about the impact on equities of a serious sell-off in gilts are making exactly the opposite mistake that banks made before the credit crunch? Banks worried about high-probability, low-impact risks but underestimated low-probability, high-impact risks - tail risks. Those who worry about a gilt market disaster, though, are perhaps thinking too much about tail risk, and maybe not enough about higher-probability dangers.

 

 

[romans holiday]

Stock & Commodity Markets Warning, January Barometer Points to Bear Markets

 

By Gary Dorsch

 

http://www.marketoracle.co.uk/Article17013.html

However, January 2010 got off to a rocky start, with commodity and stock markets tumbling worldwide, on signals that the politicians pulling the strings in the world’s two fastest growing economies - China and India, have given instructions to start withdrawing large dosages of monetary stimulus. News that Beijing is clamping down very hard on bank lending, and draining yuan through “Quantitative Tightening,” has sent shock waves from Asia, to London, to Wall Street, and Brazil, and convinced many speculators to dump over-extended long positions in key commodities, such as copper, crude oil, rubber, platinum, and soybeans.

 

The Reuters-Jefferies CRB Index, a basket of 19-exchange traded commodities, suffered a loss of 6% in January, led by the copper market - rudely interrupted with a sharp 9% decline, and crude oil fell 8%, all tracking losses on the Shanghai stock market, which surrendered 8.8% of its value. On Feb 1st, Fan Gang, a top advisor to the People’s Bank of China’s (PBoC) monetary policy committee, said Beijing must address the problems caused by excessive liquidity, and that inflation and asset bubbles are the biggest worries for the Chinese central bank.

 

Selling pressure in commodities in January was extenuated by a stronger US-dollar - which knocked its top rival, the Euro, below $1.400 for the first time in more than six-months. Big speculators began to unwind the massive US-dollar carry trade that was utilized for risky bets in global stock markets. In a virtuous cycle, a stronger US-dollar makes commodities more costly for users of other monies, and helps to contain inflation. Ironically, it wasn’t the Federal Reserve that ignited the unwinding of US-dollar carry trades, but rather the central banks of China and India.

 

Chinese and Indian policymakers became alarmed by the sharp rebound in industrial commodities, particularly crude oil, which must be imported in large quantities, in order to fuel their manufacturing based economies. Higher food and energy costs feed heavily into the consumer price indexes of the emerging Asian giants, and adjustments of interest rates and other monetary tools are often utilized by their central banks to contain inflationary pressures.

 

...

On Jan 12th, the PBoC shocked the global markets, with its first meaningful move to tighten liquidity in eighteen months. Armed with knowledge that China’s economy was growing at a 10.7% annualized rate in the fourth quarter and with its import bill in December soaring to an all-time high of $112-billion, the PBoC began draining liquidity, and clamped down on bank loans. Consequently, $12 /barrel of speculative fluff was wiped-off the crude oil market over the next two-weeks.

 

The Bank of India (RBI) followed suit on Jan 29th, surprising commodity traders, by lifting cash reserve requirements for banks by more than expected 75-basis points to 5.75%, and warned of mounting inflation, suggesting its next move may be an interest rate hike. India’s closely watched wholesale price index (WPI) is closely correlated with the direction of commodities, and the RBI has bumped-up its forecast for the WPI to an 8.5% inflation rate by year’s end.

 

On Feb 1st, India’s central bank chief Duvvuri Subbarao left no doubt about a tighter monetary policy in the months ahead. “It is the responsibility of the Reserve Bank to manage expectations about inflation and what we are going to do in the next few months is to target inflation,” he said. However, the resiliency of key commodities such as crude oil, buoyed by indications of expanding factory activity in the top industrialized nations, will make the task of containing inflation much harder for the PBoC and RBI. Therefore, traders can expect further Quantitative Tightening (QT) moves in Asian nations and hikes in interest rates in the months ahead.

 

...Still, capital flight from the weakest links in the Euro-zone bond markets is triggering the unwinding of US$ and Japanese yen carry trades, which in turn, is rattling global commodity and stock markets, and precious metals. While it’s true that the January Barometer was far off the mark in 2009, one also should remember that it’s been accurate for 90% of the time over the past 60-years. Much will depend on the degree to which the G-20 central banks drain the global liquidity swamp, which led that the emergence of asset bubbles in 2009.

[No6]

The January effect was mixed this year in that things started off well for the markets then fell off towards the end. Not sure if this is a typical January effect signal, but time will tell.

 

January Effect May Set Markets' Tone for New Year

 

The stock market faces a big test as 2010 trading gets under way: whether its performance will be lifted by the phenomenon known as the January effect, or squelched by uncertainty about the economy.

 

The January effect is the buying blip that often occurs with the start of a new tax year. Investors who sold stock before the end of the old year to claim a tax loss reinvest that money when trading begins again.

 

Market historians and many investors are fascinated by the January effect because it often sets the tone for the rest of the year. In 2009, stocks were up at the start of January; although they were at 12-year lows two months later, they ended the year having had their best performance since 2003.

 

"If the first five trading days of January are up, the end of January will usually be up and the correlated end of the year is usually up," says Ray Harrison, Principal of Harrison Financial Group in Citrus Heights, Calif. "I say, usually, but I believe we're headed that way."

 

http://abcnews.go.com/Business/wireStory?id=9468342

[John Doe]

Well the shorts are still doing well.

 

If this really is a EW 3rd wave, the big falls should commence around now apparently.

 

[No6]

China has just taken the gloss off any post Greece recovery thoughts.

 

Feb 12 - People's Bank of China surprises markets by raising banks' reserve requirements 50 basis points, effective Feb 25, its second increase this year. Few traders had expected another another move so soon after a surprisingly low inflation reading for January.

 

http://www.iii.co.uk/news/?type=afxnews&am...;action=article

[John Doe]

China has just taken the gloss off any post Greece recovery thoughts.

Makes you wonder what they know is coming down the pipeline, or, possibly, they are acting responsibly (i.e. their reported housing bubble etc)?

 

 

[No6]

Makes you wonder what they know is coming down the pipeline, or, possibly, they are acting responsibly (i.e. their reported housing bubble etc)?

 

They probably have room to play with on making these decisions. China will still probably grow "officially" at 10% a year, so taking some of the spice out of the markets isn't going to hurt them. I think there is also a lot about the Chinese banks that we don't know about and will probably never know about.

[littledavesab]

sitka pacific 2009 review / 2010 thoughts - just received email link to this on Tuesday so despite the title it must be new - or have been restricted to clients only until now. Mish's people are always worth a read.

 

http://www.sitkapacific.com/files/Sitka_Pa...nual_Review.pdf

[jerpy]

sitka pacific 2009 review / 2010 thoughts - just received email link to this on Tuesday so despite the title it must be new - or have been restricted to clients only until now. Mish's people are always worth a read.

 

http://www.sitkapacific.com/files/Sitka_Pa...nual_Review.pdf

 

Bullish on gold, fancy.

[John Doe]

Dow now at fib retracement of recent falls.

 

Might open a small short position.

[John Doe]

After an absence of several weeks (Shortly after calling the DOW top at 10712 (with caveats as always), before it fell ~900 ticks) Sandy Jadega reported Tuesday morning that for a confirmation for the bears, DOW would have to quickly drop below 10334 which, later that day, it then did.

 

http://www.londonstockexchange.com/private...strongrally.htm

 

I like this guy as he always stresses probable, rather than definite, trends and has helped me identify low risk in and out points.

 

His latest reading sees the resistance at 10388-10538 as being key.

 

[drbubb]

Next week will be interesting

Chart is from RogerD on the Yelnick Blog: his charts

 

Here's Ryan Henry's comment:

The indices continue to find resistance at important 61.8% retracement levels this week after pulling back off these levels on Tuesday. However, with price immediately recovering a large portion of Tuesdays weakness today, its becoming more and more difficult to think that downside potential will survive this recovery. This is because the recovery now threatens to turn impulsive, and if this up leg in February is impulsive, it would tell us that higher prices are likely, either in a larger B wave correction back towards January?s highs or in something bigger to the upside.

/see: http://stockcharts.com/def/servlet/Favorit...et?obj=ID418831

 

Note: I think he wrote that before he saw Friday's weak action, which may have set price up for a big fall next week.

[John Doe]

Next week will be interestingNote: I think he wrote that before he saw Friday's weak action, which may have set price up for a big fall next week.

Well thanks to your warning on the gap down being filled, I am now short again, with ~150 ticks in the bank :-) (with stops just above Sandy's suggested resistance).

 

Hopefully we will now see some serious falls, although my oil have done nicely again this morning.

[littledavesab]

I see Sandy posts his stuff on the LSE website

 

So does this guy occasionally - he was bullish at the start of last yr (2009)

 

http://www.londonstockexchange.com/private...ectioncycle.htm

 

Our long-term economic trend is weak. It suggests disappointing stock market returns in the months ahead. Another problem UK investors must contend with is the US presidential election cycle. It has a marked affect on the UK stock market.

 

The economic news is weak but the UK stock market rose sharply last week. It makes a clear point that short-term stock market swings are poorly correlated with long-term economic trends. There have been many other instances in the record books when no growth or slow growth was associated with share price spurts. Some of them were quite sizeable.

 

But short-term blips eventually run their course in a weak economic environment. History shows that economic trends have a significant influence upon longer term stock market returns. If growth is weak, and future prospects are disappointing, it is rare for shares to deliver substantial rewards.

 

This is an ominous message for UK investors in the months ahead. We may have weathered the very worst of the recession but the UK’s long-term economic trend remains disappointing. Recall that we slipped into recession before most of our competitors. The downturn hit us harder and lasted longer. The latest evidence confirms that our recovery will be abnormally slow. The US economy grew 5.7 per cent in the fourth quarter of 2009. Growth on this side of the Atlantic was just 0.1 per cent.

 

The UK stock market is reacting as one would expect. The S&P 500 rose by 1.8 per cent in December versus a Footsie rise of less than one-tenth of a per cent. Shares fell on both sides of the Atlantic in January but we slipped by more. I anticipate relative UK weakness to continue in the months ahead. Declines will probably be steeper and rallies will be weaker.

 

Pressure on shares might come from other sources are well. My research finds that the four-year US presidential election cycle has a notable effect on both sides of the Atlantic

 

The chart shows the odds of a gain for UK investors in each year of America’s four-year election cycle. The data summarises the last 12 elections going back to 1961, a half-century ago.

 

Notice the Year-Two Curse. Prices rise less than half of the time, the weakest profit record in the cycle. Follow-up research finds more bad news. After focusing solely on profitable years within each group, I find that year-two gains are typically the weakest of the group.

 

 

 

Year-two received a healthy boost in the 1980s when shares gained more than 20 per cent in 1982 and 1986. The trend was very much weaker in the remaining four decades when year-two was not aided by a booming 1980s-type bull market.

 

No one knows with certainty why the Year-Two Curse strikes so frequently. One plausible reason is that presidents are like all other politicians. They like to win elections. Painful economic decisions are often made early in a cycle. The goal is to get the economy firing on all four cylinders when voters next return to the ballot box.

 

There are no guarantees for 2010. But to my way of thinking, it is another worrying signal for the rest of this year. Happily prospects for 2011, year-three in the cycle, look quite positive on this indicator.

 

see link for graph

 

 

[John Doe]

Interesting thought on the two year curse. I had heard of this guy before, but hadnt noticed he was also on LSE.

Cheers

[Rosco]

Interesting article on Chinese liquidity management

 

http://www.ft.com/cms/s/0/acbfd2a6-2663-11...144feabdc0.html

[littledavesab]

Interesting thought on the two year curse. I had heard of this guy before, but hadnt noticed he was also on LSE.

Cheers

 

He might be the UK's answer to Bob Hoye in being a stock market historian - if we were not for the fact he usually is bullish

 

Still regretfully his posts on the LSE are rather infrequent

[John Doe]

Dow now at the strong resistance S J mentioned earlier this week, with the previous high ~10723 as major resistance. Need big falls early next week or 10723 next target before correction.

 

 

[S60R]

Dow now at the strong resistance S J mentioned earlier this week, with the previous high ~10723 as major resistance. Need big falls early next week or 10723 next target before correction.

 

True. SPY on the other hand is revisiting the area of strong resistance now. The US markets aren't close yet but the volume has been very low, we have a doji indecision day, indicators are getting close to the areas where the selloff happened a couple of months ago, the AB=CD pattern is virtually complete and perfect, yes and tomorrow is 9th of March. Shorting with a tight stop loss is what I am about to do now.

[littledavesab]

http://www.lowryresearch.com/

 

Tends to get a mention on FSN part 1 every week - might be interesting to keep track of it here, help keep the thread going

 

This week

 

Selling pressure reduced by 22 from 677 to 655

Buying pressure increased by 22 from 192 to 614

 

No signs of topping

 

+ Baker Hughes rig count is up 11 to 1407

[John Doe]

Yep, not looking good for the bears.

 

[John Doe]

Almost time to short again?

 

Nearly at the 10970 resistance suggested by Sandy Jadeja last week

 

http://www.londonstockexchange.com/private...upwardmarch.htm

 

 

[littledavesab]

Almost time to short again?

 

Nearly at the 10970 resistance suggested by Sandy Jadeja last week

 

http://www.londonstockexchange.com/private...upwardmarch.htm

 

Could be

 

FSN (am a little behind in my listening this week - gave some excellent KWN interviews priority instead)

 

Lowry's

 

6 point drop in buying pressure from 214 to 208

3 point rise in selling pressure 655 to 658

 

They see a short term shallow sell. Also a muttering about moving from large to small caps.

 

Rig count = 1427 up 20.

 

[John Doe]

Could be

 

FSN (am a little behind in my listening this week - gave some excellent KWN interviews priority instead)

 

Lowry's

 

6 point drop in buying pressure from 214 to 208

3 point rise in selling pressure 655 to 658

 

They see a short term shallow sell. Also a muttering about moving from large to small caps.

 

Rig count = 1427 up 20.

Just opened a short on the dow at 10940 (Tight stop)

 

Fingers crossed