A recent message quoted Bob
Marley’s
song “Three Little Birds” singing “No Need
to Worry”. However, the US equity market is flipping
us three big birds that say “there is plenty to worry
about here”.
The first worry is the hundred year plus
trend that our messages have looked at for over a decade.
This trend says that the market runs in 15 year (+ or -)
up and down waves. Back in 1999, when the Dow was screaming
towards all time highs we shared a graph showing these US
stock market 150 month waves. First for 150 months or so
the market goes up. Then for 150 months it goes down.
The graph also showed how these waves tend
to flow in 2 to three year mini cycles. The market goes up
for two or three years and then down for tow or three years.
You can see the graph at garyascott.com/images/20021121b.gif
Right on schedule in the year 2000, after
the Dow soared above 12,000, the bear market began and over
the next three years a downturn took it into the 8,000 range.
Sure enough in 2003 things began to look
better. The bear market recovery began and has lasted from
January 2003 (about three years). This brings the Dow back
into the 11,000 range.
Now the market is beginning to look sour.
It should. The graph has told us so.
You
can see the five year chart of the Dow
The second bird is seasonality. SEE
ARTICLE
This message says: “The end
of May is the month when seasonality dangers begin and
this reoccurring trend appears to be running true to form.”
In January 2004 I wrote “October has
traditionally been a month when we see stocks markets fall.
This is based on statistical analysis (see
our message about seasonality) showing basically in all
major equity markets, nearly all returns are achieved from
the beginning of November through the end of May. So October
is the equity markets darkest hour. The end of May has arrived,
so you have been reminded! Historically for the next five
months the chances of equity profits are at their lowest.
Risks are the highest.”
Also take note. The last climb of the Dow
began (surprise surprise) last November. SEE
DETAILS
The third bird is the falling US dollar.
This is likely to chase overseas investors out of the US
equity markets and hasten any weakness that is already there.
These three technical factors coincide now
with the weak fiscal fundamentals (high federal debt and
huge current account deficit) in the US. They create a self
reinforcing downwards loop. The weak dollar drives down the
market, and as investors flee the market they trade in their
dollars for other currencies. The sell off drives the dollar
down so more investors flee the US market. This could be
ugly.
Of course I could also be wrong. History
never repeats exactly as it did before. Plus there will always
be some shares that do well. Just be aware that three historical
birds are singing us a tune “you do need to worry.” Be
cautious with your US dollar and equity investments now.
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HOW
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