TSX Composite Index Short-Term Expectation...February 11, 2010

Every once in a while I stick my neck out and make a short-term market forecast. The TSX Composite Index has a short-term wave pattern that has the earmarks of an index that will be making new short-term lows. The rising, so far, triangle shaped pattern with overlapping waves... suggests that the buyers are losing ground to the sellers. The probabilities favour the index dropping below Friday's low near 11,000.

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.

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.

TSX Index Funds On Sale Today - 10 % Off!

Because the index always comes back after a decline, S&P TSX Index Funds are on sale today for a discount of at least 10 percent minus any fees. Over the last few weeks, after reaching a peak of 14,646 in July, the TSX Index has now dropped back to near 13,300 today. In the future, when this index recovers back up to the previous 14,646 level, this will be an increase of 1,346 points or 10 percent (1.1 * 13,300 = 14,630).

If market history teaches us anything...it is that the index will recover those points at some point in the future. It may take 2 months, 6 months, a year or longer but it will occur. Need, greed and fear guarantee it. The probabilities favour a shorter time frame for recovery.

We can't know when the low is reached, there may in fact be a much better sale price later on...in any event a net profit of perhaps 9.5 percent is available today for anyone who has the courage and funds to buy the dip.

This approach is not valid for individual stocks or for narrowly focused "stock picker" type mutual funds. Only the index fund comes with this 10 % guarantee.

When the 10 % increase occurs a number of stocks in the index will increase more than 10 % but we can't know which stocks they will be. More importantly, some stocks in the index will continue the downward trend or increase less than the 10 percent. Some stocks may never recover. An index fund guarantees average market performance in return for giving up the opportunity for "stock picking".

If I buy more index fund today I must accept the possibility that the index can go lower, perhaps much lower before I see my 9.5 percent profit at some time in the future. Part of the price I pay is having to live with the discomfort of watching my investment drop in the short term.