Larry Edelson- Dow Stocks Bear Market Ended in October at 7884
Stock-Markets / US Stock Markets Nov 06, 2008 - 11:51 AM GMT
We have a lot of ground to cover today. So forgive me if this issue jumps around a bit. But there's just not enough space in this column for me to cover everything in as much detail as I would like to. Yet there's so much money to be made in the next few months that it's mandatory I get my views out on the following topics, even if I have to be brief:
- The Dow …
- Emerging economies, and …
- Gold and oil
Having said that, let's get right to the heart of the matter, where I think you can make bundles of money in the months ahead …
The Dow May Have Hit Rock Bottom …
Based on several technical indicators that I monitor, I am willing to go on record with the following statement …
The October 10 nominal — meaning the non-inflation-adjusted — low in the Dow Jones Industrials, at 7,884.82, may well end up as the low for the entire bear market.
I know you're not hearing that anywhere else. And a lot of people will call me certifiably insane.
But that's just fine with me. It wouldn't be the first time …
- I was pretty much on my own and labeled a madman when, at the bottom of the Crash of 1987, I called for the Dow to make new highs within three years.
- I was also a lone, crazy voice back in 2000 when I said gold was bottoming at $255 and headed to new record highs and that oil was a steal in the low teens and headlined into a rip-roaring bull market.
- I was pretty much on my own when, in early 2001 — mind you before 9/11 — I called for the dollar to enter a multi-year bear market.
- I was also pretty much all on my own when, in late 2006, I said that if the Dow broke through the 11,400 level, it was headed to 14,000.
- And at 14,000 in October of last year I told everyone who would listen that the Dow had peaked … to get the heck out of almost all stocks … and the U.S. economy faced a wakeup call from hell.
So I don't mind being a lone voice now either. In fact, I prefer it that way. Some of the best market forecasts are made when you have almost no company in your camp.
Mind you, even if I'm right and we have seen the lows in stocks, it does not preclude the possibility of future sharp downdrafts from occurring. Or even a retest of the lows that will make me look foolish.
But right now, I am confident that the rally you're already starting to see in the stock markets — and in commodities — could continue for several weeks, possibly even several months.
It could easily send the Dow back to the 12,000 level. Gold back to $900. Oil back to $100.
And that's just for starters!
Does all this mean that I believe the credit crisis is over? No, it's probably not over.
So …
Let's Look At the Markets and Economy Realistically And Objectively as Savvy Investors and Traders …
A. Stock markets lead fundamentals. It's perfectly normal to expect stocks to bottom before the fundamentals of the economy start to look any better.
 |
| The Dow bottomed in 1932. But economic numbers didn't head up until 1935. |
Indeed, during the Great Depression, the Dow bottomed in 1932. But bad economic news continued to stream out for another three years, with economic stats not showing any signs of turning up until 1935.
In the next great bear market, the 45% loss in the Dow between 1973 and 1974, the Dow rallied a whopping 53% from its 1974 low — even as bad economic news poured out of the economy for the next 18 months.
[Also note that toward the end of 1974, after the Dow had bottomed , inflation started to spike higher , reaching 10.3% by early 1976. Inflation continued rising all the way through 1980, blasting gold skyward to $850. The main cause: Just like today, massive money pumping by the Fed.]
Another, more recent example comes from Sweden. In the early 1990s, Sweden experienced a housing bust worse than what's happening now in the U.S. Bad debts related to the housing collapse reached 12% of Sweden's GDP, far greater than what we're seeing in the U.S.
In September 1992, Sweden's government injected capital into failing banks and implemented blanket depositor insurance.
In the 12 months that followed, Sweden's stock market soared 42%, even while the economy continued to recede.
Bottom line: If you're waiting for bad news to stop streaming out of the economy before investing or speculating again, you're going to miss the profit boat, big time.
Fact is, the stock markets — and indeed most markets — look ahead, not backwards. Always keep that in mind.
B. As I already pointed out to you in my last Money and Markets column , and on several other occasions, the Dow, and indeed all assets, must be looked at in inflation-adjusted terms and, more precisely, in terms of gold to truly understand their values and to put them into historical context.
And in that sense, at its nominal low of 7,884.82 on October 10, the Dow in real terms had already lost 77% of its value and was trading at a real inflation-adjusted equivalent of about 2,550.
When looked at in real terms, that also means that the bulk of deflation is already past us. Ditto for commodities.
Put another way, it also means that the Fed, indeed all central banks' attempts to reinflate asset prices, should soon begin to have an impact on markets.
 |
| After the U.S. went off the gold standard in 1971, the Fed and other central banks printed money like crazy. |
That's what happened after the 1973 to 1974 bear market, which I believe is a better analogy to today's economy and markets than 1929 to 1932.
Reason: As I have oft mentioned before, during the Great Depression, the U.S. and global economy was shackled down by a gold standard. Asset prices only started to rise again once the dollar was devalued by raising the official dollar exchange price of gold.
In the 1973 to 1974 bear market we did not have a gold standard. So the Fed and other central banks printed money like crazy. And even though the economy remained in a severe recession for several more years — inflation went through the roof igniting a rally in both stocks and commodities.
The same thing is about to happen again.
Another reason I believe big rallies lie ahead …
C. All of the technical indicators I monitor strongly suggest that both stocks and commodities are more oversold than they have been in decades.
On many indicators, the Dow is more oversold than at any time since 1932.
On other indicators, it's more oversold than it's ever been.
And on still other indicators, it's more undervalued and oversold than it has been in at least the last 50 years.
Also consider the following: On October 10, 87% of all stocks on the NYSE hit new 12-month lows.
That kind of downside breadth exhaustion, where more than 50% of NYSE stocks hit 12-month lows at the same time, has occurred only four times — in 1962, 1966, 1970, and at the crash low of 1987.
Each one of those data points was at or within a few weeks of a major bottom.
Similar technical indicators and data show that most commodities, including the majors — gold, oil and grains — may have also made major lows.
D. Additional bullish supporting evidence is coming in from my technical and cyclical models on foreign stock markets, especially India, China, Hong Kong and Singapore .
All of my indicators on those markets also suggest powerful rallies lie ahead. The most bullish of them: India and China.
So what to do right now?
First, as bullish as all of the above sounds, don't rush out and start buying stocks hand over fist. More confirmation is needed before getting aggressive.
Second, you'll want to be very selective.
The best performing stocks going forward will be, unquestionably …
- Natural resource stocks. Based on companies producing goods that are needed by people in good and bad times. Goods with intrinsic value.
- Defensive consumer staples, similar in a way to natural resource stocks in the sense that they represent products that are always needed. Food. Beverages. Drug companies. Household product companies.
- And yes, emerging markets, which will come back with a vengeance.
For right now, I recommend getting your toes back in the water with exchange traded funds (ETFs). Consider buying them on the next pullback you see, and use a protective sell stop 7% below your entry price to help reduce risk.
My favorites …
— The iShares MSCI BRIC Index Fund (BKF)
— The Dow Diamonds ETF (DIA)
— The Energy Select Sector SPDR (XLE)
— The SPDR S&P Metals and Mining ETF (XME)
And for more specific instructions, timing and higher profit potential plays, be sure to subscribe to Real Wealth Report .
Best wishes,
Larry
This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .
Money and Markets Archive |
© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.
