A down week or a major turning point for stocks?
Posted on 23 June 2009 with no comments from readers
It is worth looking at this updated chart from time-to-time. This financial comment website, which is concerned with analysis rather than outright predictions and is not intended to guide day traders whose gambling general fails in the long-run, has argued consistently that this has been a bear market rally.
Admittedly it has been of unexpectedly long duration. The cracks did not show until the 13-week mark as this website correctly pointed out. Now the markets have turned down it is difficult to say whether we will see an immediate plunge back to very much lower valuations, or have a short correction, move sideways and then have a final capitulation.
Hyperinflation scenario
Even that might just be avoided if hyperinflation comes to the rescue as Jim Rogers thinks it will and Dr Marc Faber has also highlighted this possibility. It might even make Howard S. Dent’s old Dow at 20,000 in 2009 forecast come right (see next article).
But on balance a big capitulation looks far more likely. Why should it be different this time? OK we have the stimulus packages and bailouts. But we also have the biggest collapse in global trade ever and the most indebted global economy in history unwinding.
Rogers and Dr Faber undoubtedly have a point. The central banks will respond to another financial crisis with more of the same weapons, and that will usher on hyperinflation unless they are very clever, lucky or both.
Not different this time
Yet to see the outlook at this point in the stock market cycle as so different to say 1930 or 1931 is tough. It just does look like a repeat of a historical pattern, and the best we might now expect is the stagflation of the 70s instead of the depression of the 30s.
What is there now to prevent a repeat of last summer to autumn’s crash? Sadly it has only been misplaced investor optimism about recovery and a conspiracy of optimism between Wall Street and Washington that has produced this bear market rally. Financial and confidence indications of recoveries are smoke and mirrors, not the real thing.
That Mr Market will respond by lurching from unwarranted optimism to manic depression now looks inevitable. Human psychology drives markets up and it drives them down.
