Thursday, January 28, 2010

World Stock Markets Looking Weak January 28, 2010

I continue to study the market charts looking for more clues as to what is going on. My main tool is the Elliott Wave Principle (EWP). I also use other forms of Technical Analysis. I do not ignore the fundamentals.

The results of my review continue to indicated that the bear market will most likely continue below the March 2009 lows. The index charts for Canada, the US and Japan are all very similar and tell me the same story.

I can't say how much lower the stock markets are likely to go but the situation continues to have the potential to develop into another 1929-32 bear market degree of severity. The loss during the 1929 bear market was about 89 percent. For comparison, the current bear market was closer to a 60 percent loss at the March 2009 lows.

I only refer to the 1929 bear market to give people something for easy comparison. My analysis is based on a great deal more data than one particular bear market. I successfully recognized the approach of the bull market peak using the EWP and this was not the first important market turn that the EWP allowed me to recognize.

If we do see a 1929 type scenario, investors who currently subscribe to the 'buy and hold for the long term' are risking holding shares or mutual funds that may take 25 years or more to recover back up to the bull market peak (2008 for Canada and 2007 for the US).

A few comments on the economic situation and human psychology

The news from official reports (economists/government etc.) are anything but rosy at this time. Governments continue to be worried. And, many investors recently burnt by the unexpected bear market slide down to the March 2009 market lows remain nervous at this time. Many continue to be sitting in a relative loss position.

I speculate that any relatively fast downward market moves at this time may lead to a panic that will be comparable to, or worse than, what we saw leading down to the March 2009 lows. This is what occurred in the 1929 bear market. Believe it or not, this is normal market behavior under the EWP. Bear markets frequently exhibit three distinct legs, one down, one up and one final down move. This was the case in 1929. After a very strong rally of about 50 percent on the way down, the floor fell out of the market for the second time taking it to the ultimate 89 % loss bottom.

With us humans we tend to think and act with a herd psychology, especially when we are afraid of something. If a lion grabs a Gazzel at a water hole the rest of the herd panics and runs for safety. People act in a similar fashion in the stock market.

I wish I had better news.

Thursday, January 21, 2010

TSX Composite Index, January 21, 2010

The stock markets may be near an important junction. The one year chart for the TSX Composite Index shows the rally since the March 2009 low. An impressive increase over a relatively short period of time. Without getting into a lot of detail....the circled breakout below the trendline has the potential to turn out to be an important market downturn. Other indexes in the US are at a similar juncture. We could see just a large temporary downturn in a continued uptrend or the bear market may continue to some point below the March 2009 low.