Monday, October 20, 2008

US and Canadian Stock Market Milestones

Many of us are wondering....How deep will the Bear Market go? How bad might it get?

So far we have only seen about a 40 % loss in the major market indexes. The extreme I have seen so far is the Canadian Venture (penny stocks) Index. It was cut by about 70 percent at the low in October.

My review of a handful of Canadian Mutual Funds, mostly TD funds, indicted that fund values have been reduced by 30 % or greater more depending upon the fund. Dividend stock funds have suffered the least so far. Small Cap Funds and Energy Stock Funds reached lows near a 50 % loss in October. All funds have rebounded a little since the October lows.

I have no way to estimate the ultimate Bear Market low at this time but I can see a few scenarios. As the Bear goes deeper and deeper some of the possible "least severe" scenarios are off the possible list.

The Stock Market is governed by rules, but the rules allow it a great deal of flexibility, and at any point in time it has more than one possible future. This makes perfect sense since the people who will buy or sell next week, next month or next year have not yet made those decisions.

I follow both the US and Canadian Stock Markets. They are quite similar. I have used the Elliott Wave Principle to evaluate the markets for many years. This knowledge allows me to periodically "take the pulse" of the market to determine where it might go in the future. It has allowed me to call many important market turns, frequently on the same day they happened. Most recently, it allowed me to see "the possibility" of a big downturn in the market back in late 2007 and I sold all of my stock market related long positions well before the recent large drop in the markets.

So now, like everyone else, I look for signs of a bottom. The best I can offer at this time is a few milestone market levels. From a technical standpoint, the US Markets are ahead of Canada in their decent. They have already passed one important milestone and are approaching the next. If the DJIA breaks below the late 2002 low near 7,100 then a much deeper Bear could occur. In one scenario, it may then be in the process of correcting the entire history of that Index, back down to much lower levels.

The Canadian TSX (Toronto Stock Exchange) still has one more "less severe" option. Here, there are two milestones close to 6,000. If the TSX Comp breaks below 5,700 then it could be a much deeper Bear Market.

We can look for "bottoms" occurring above these milestones, and on occassion, just above them. Its limited information but its better than just guessing, or listening to the news media pundents who attempt to relate current events as the only factor in market moves. The truth is that the current Bear Market is a normal retracement of portions of Bull Markets that have lead up to it. The real question is... where did the Bull Market start, the one being corrected by this Bear Market?

As time goes on, if the market creates patterns I can recognize, and I'm paying close attention rather than out enjoying the outdoors somewhere, I may be able to see a possible bottom forming. Stay tuned for updates.


Anonymous said...

I read your comments every few weeks and the advice nicely fits my amateur understandings & investment moves -thank you...wish I had invested more heavily in HXD:) I don't understand why goldcorp and TSX gold index is taking such a hit - I made an assumption that it would be a good safety net - would you like to comment - thanks.

Canadian Money said...

The answer lies in the Elliott Wave Principle. You might want to pick up a book or two at the library.

Goldcorp is just a stock. It has two components in the price, the business value and the speculative component.

At the point the markets started downward the speculative component was relatively large and it was time to make a big correction. This happens periodically when a 5 wave cycle is completed. The current Bear Market is correcting a relatively large Bull Market (5 wave cycle). Therefore, the correction has to be a big one.

This is normal market action. Eventually the Bear will end and a new 5 wave cycle of greed (the next Bull Market) will begin anew.

When the markets fall its a little like a tide in an ocean going lower. All the boats in the ocean drop with the tide. For example, if Goldcorp is in a number of mutual funds and people sell their units all the stocks in the fund suffer.

During the creation of a bubble, especially near the peak, all reason goes out the window. A similar thing happens during a bear market.

Hope this helps some.


Krista Billy said...

I stumbled upon the blog and was surprised to see the loss that the Canadian stock market suffered during 2008. It’s interesting to see how in 2008 the US market was doing better than the Canadian market and how in 2011 the Canadian market is doing better than the US market (