In the next few weeks we face a crucial juncture as all global markets consolidate against strategic support levels after this summer’s disastrous sell off. Holding support becomes of utmost importance if we wish to keep crisis from becoming a catastrophe.
The data still looks menacing, as sentiment, purchasing, capital expenditures, and manufacturing cool off. According to statistics, the pace of advance is at its lowest level in months.
And yet pockets of economic strength continue to do well. Mining, Energy, Agriculture and Biotech have each receded less than the market, or not at all.
The key to a market reversal (upwards) still lies with the consumer. As the collective IQ of the investing populace diminishes, volatility expands. Ravaged by daily trading ranges that defy gravity, investors one day run in, and the next day withdraw just as quickly. Hardly the stuff of long-term methodology, traders defy logic by following 24 hour fads.
Altogether, the sequential movement of stock prices is not difficult to understand. The markets ran up on speculation and leverage, and as the hype and leverage unwind the corresponding drop takes on magnitudinally disproportionate effect. Short-term trend movements obviously look more severe, graphically, than larger movements within the context of accumulation, price mark-up, and distribution over the long term.
As uneasiness builds, investors seek short term safe haven, which only confirms the success of long term patterns in Energy, Basic Materials, and Non Cyclicals.
As news from around the globe continues to frighten or disappoint, it heightens the potential for a distribution (not yet a bear) cycle to widen and expand. Revised data from early quarters (2007) already shows economic stagnation worse than previously reported.
I don’t believe that the sting from these data can get much worse, however. Compared with glorified expectations earlier in the year, it looks to me as if malaise and discontent with the market has hit home forcefully and enduringly. In much the same manner as the dot.com debacle, the unwinding of the global and domestic credit crunch hits with a one-two punch that stings, and takes all the fun out of owning stocks.
In response, cash, gold, oil and short-term time deposits replace real estate speculation, mergers and acquisitions, and IPO’s as the investment of choice. Using a conservative barometer as a benchmark, I would expect a period of uncertainty and fatigue to last a little bit longer. I will caution my clients that we are closer to the start of the downswing than to its conclusion. I urge the utmost discretion when trying to “buy” into a downside consolidation pattern, as upticks can be quite seductive.
On the other hand, I fear that interest rates are going to rise, as indicated by their secular long term direction from their lows in 2002-2003. As a result, I see continued price pressure and inflation patterns becoming part of the permanent landscape. It is very difficult to dispute the data and patterns of advancing inflation.
Unfortunately, the confluence of the sub-prime credit crunch and inflation will negatively influence real estate and housing prices in the short run, or until the damage can be assessed, before any bounceback in that sector.
Overshadowed by a cloud of uncertainty, the markets present more probability of downside risk and a trading range that keeps getting more challenging.
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