21st Century Alert
Morning Briefing
MONDAY a.m.
June 2, 2003
The Nikkei in 1993
Even though the markets have embarked on a brutal bear market
journey over the past three years, it could be worse. At least
we have the canonical "anti-bubble" case study, the Nikkei, to
let us know how the back-side of a bubble can play out.
Since our markets have now moved into a position to trigger all
sorts of technical buy signals, and to get the crowd
unequivocally bullish and excited about the prospects for the
future (danger, danger), I decided to check back at an equivalent
point in the Nikkei's bear market. The results are interesting,
to say the least.
Here's a chart of the Nikkei in 1992-1993:
[Image 1: Go to Web site to see image]
First off, there is almost unbelievable resemblance to our
current market. The Nikkei hit a big low in Aug/Sept, and then
hit another bottom in early March, which led to a massive
straight-up rally into April and May, taking it right to the
"neckline" where prices had suffered the earlier breakdown. By
the way, this neckline still has not been penetrated to the
upside , a full 10 years after it was broken.
This brings up another point about Didier Sornette's predictive
model of an "anti-bubble regime," which I've cited often. There
are clearly recurring patterns of price based on positive and
negative feedback loops of sentiment in the markets. How can
this happen? During a bubble and its aftermath, price movement
has completely disengaged from the "normal" way in which
companies and stocks are valued and traded. This de-coupling
leaves investors and traders confused, and primarily reactive to
the latest trend.
If it's up, they're bullish; if it's down, they're bearish. This
is the natural way for the markets to clean up, and clean out,
unsuspecting and confused investors and traders. This is why our
sentiment timing indicators have worked so well, giving us 100%
successful trades "fading the crowd" over the past two years.
Just to refresh, over this past 10 month period, here were our
actual timing signals:
[Image 2: Go to Web site to see image]
Following these recommendations in the Rydex funds would have
produced a cumulative (hypothetical) gain of 102% since the buy
signal on July 24th, 2002, trading in and out of the Rydex funds.
This is adding up the profits and deducting the losses (zero).
And since I'm benchmarking with end-of-day NAVs on the Rydex
funds, these are real-world prices I'm using.
So this fading-the-crowd stuff works, plain and simple. Yet
everybody is feeling right now that it doesn't, because the
markets have set about building a mini-bubble to the upside,
right in the middle of the bear market slide.
One astonishing thing is that Professor Sornette's model
predicted just this benign period, anticipating a modest bounce
to the upside (in the context of the bigger bear market, this
bounce is indeed modest). As you can see, this rally is entirely
appropriate and expected within the context of a multi-year bear
market decline:
[Image 3: Go to Web site to see image]
One thing I find a little ironic right now is the new bullish
mantra that the "trend is your friend", and you should never try
to pick market reversals, because trends can extend further and
last longer than anybody can predict. I find this ironic because
it is the bulls that are actually fighting the trend . They are
fighting a multi-year secular bear market, trying to pick the
precise reversal point of a decline of mammoth proportions. That
strikes me as a very dangerous business, especially when the
crowd is embracing this story so willingly.
Yet the market continues to extend to the upside. This happens
once in a while. Sometimes sentiment gets driven to extremes,
and just stays that way for a long time. This is the downside of
the methodology I use, which is to always strive to be in the
minority in mid-term positions. Sometimes the majority has its
way -- for a time, anyway. Invariably during this extension the
"mob-think" becomes enormously seductive, as appealing as the
Siren song to a strapped-to-the-mast Ulysses.
But of course it's a trap. It has to be, by definition. And you
can write to me, and give me comparisons from 1998 and so on, but
I personally don't want to base any bullish analysis on what
happened during the greatest bubble in the history of the world.
Those are not valid historical precedents, in my opinion. Those
are valid comparisons if we're building a bubble, mind you -- and
we're definitely building a mini-bubble, just like all the other
bear market rallies -- but in terms of what happens during a real
secular bull market, give me a break. We're not even close.
If we have to play defense on our 50% Rydex position in the
Tempest fund, then so be it -- we'll do it. I'm looking at SPX
974 as an important level, for a variety of reasons, and if it
looks like the upside is going to extend beyond there then we
will take defensive action. Even though it hasn't ever come up,
and I've never even had to bring up the topic, I'm looking to
keep capital losses in the 10% range with Rydex positions. Since
I only recommended 50% allocation this time around -- in
anticipation that this mini-bubble had the potential to extend --
we've got a lot of "wiggle room" on this position. However,
above SPX 974 and there's no telling how high the bubble will get
inflated, and we'll take action at that point.
But let's get back to the Nikkei. That was a great run to the
upside it had back in March to May 1993, so I gazed through the
archives of the Wall Street Journal to see what market pundits
were saying about Japan at the time. This was an amazing
exercise, from a sentiment standpoint. If I simply replaced the
words "Nikkei"and "Japan" with "Dow" and "U.S.", the commentary
from back then would be interchangeable with current musings
about the U.S. market.
I saw dozens of articles that fit this bill, but I'll excerpt one
particularly appropriate one right now, from the Times of London.
Keep in mind that this was written right near the peak of the
Nikkei's rise off the March bottom, and a few months after this
the Nikkei had plunged from 21,000 to 16,000. 10 years later it
sits well below 10,000. (I'm not saying that our situation
resembles Japan's structurally -- so please don't e-mail me! --
but there are definitely similarities in terms of crowd behavior
and sentiment.)
Again, THIS IS FROM 1993. I'm only running it here for
comparative purposes to our current situation.
Japan's bulls charge again
Jeff Randall, City Editor
04/18/1993
The Times of London (Copyright 1993)
DEALERS in Japanese shares are increasingly confident that
Tokyo's three-year bear market is finally over.
Stockbrokers believe the Japanese government's 76 billion
(Pounds) package of public investment and tax concessions,
unveiled last week, will underpin the Nikkei index at about
20,000 and could give Tokyo share prices the impetus to continue
their recent surge.
Kiichi Miyazawa, the prime minister, said his spending proposals
should enable the country to meet its official forecast of 3.3%
growth for the fiscal year ending March 1994.
Having bumped along between 16,000 and 17,000 for the first two
months of 1993, the Nikkei has risen by more than 20% in six
weeks. It closed on Friday at 20,297, the first time it has ended
the week above the psychologically important 20,000 level for
more than a year. Investment houses that called the turn have
enjoyed big capital gains. Among the new bulls of Tokyo is Morgan
Stanley, the Wall Street investment house. Four weeks ago, David
Roche, its global equity strategist, told his firm's
institutional clients to "buy" the Japanese market. "We were not
in for the first 8% of the recent rise," says Roche, "and some of
our clients thought we had missed the boat. But the economic
factors, such as very low interest rates, are right for further
progress. We shall continue to recommend being overweight in
Japanese equities up to 24,000."
It has been a long, hard road for shareholders in Japanese
companies. After a 38-month bear market, Tokyo's worst postwar
slump, there are some who still refuse to believe the worst is
over. But many blue-chip foreign investors, who rode the Nikkei
bull run all the way to 39,000 in 1989 only to see it collapse to
below 14,000 in 1992 are looking at Tokyo with new confidence.
According to John Fletcher, Japanese specialist at Smith New
Court, the broker: "UK fund managers are increasing their
weighting. About 70% of the big British institutions are back in
Tokyo, with only about 30% remaining cautious. Money is also
coming out of the US, where shares are beginning to look fully
valued."
Fletcher, however, is more optimistic about the fundamental
factors behind Tokyo share prices. "You can't pump in investment
of this level (Pounds 76billion) without it spilling over into
the stock market. Some investors have been caught napping by
events in Tokyo and are trying to catch up. Our year-end target
for the Nikkei index is 25,000."
Sentiment Dashboard
by Adam Oliensis
[Image 4: Go to Web site to see image]
SENTIMENT TANK: The tank drained 6 points to 2% full of negative
sentiment on Friday.
SHORT-TERM: The hourly gauge has been weaving around neutral
with slight variations, the most recent or which puts the bias
toward an advance phase. (We will very likely have to recalibrate
this gauge to become more sensitve because its fluctuations have
shrunk.)
MID-TERM: The mid-term gauge progressed 7 points to 44% in its
decline phase. Our Confidence Diffusion Index (CDI) regressed to
a neutral reading of ZERO.
LONG-TERM: The weekly gauge is is within a point of pointing
straight up at 100/0. The weekly CDI popped to a bullish ONE.
BOTTOM LINE: The market has been able to continue to advance on
an extreme absence of bearish sentiment. That has to be
considered a bullish divergence. Most often the market requires
more than a teeny "pip" of fear in order to advance. With the
tank pegged between 1% and 10% the inverse correlation between
the" level of negative sentiment in the tank" and Price has not
in fact broken down. However the tank's fluctuations have become
much, much smaller and the market has started acting like some
turbo-charged futuristic vehicle with a Vulcan carburetor that
can generate great torque while burning almost no fuel.
We have moved through 7/16 of a decline phase on the mid-term
gauge without Price turning down. We continue to believe that
this is non-normal behavior engendered by "backwash" effects from
the extreme levels of negative sentiment that persisted before
and during the war. As with many kinds of "runs" in various
markets, this one could continue for much longer than is
reasonably imaginable before the fact.
If the VIX drops below 20.5 on Monday that will likely send our
mid-term gauge into a neutral or bullish phase. However if we
get a spark of fear that drives the VIX up from Friday's close of
21.70, then the mid-term gauge will continue giving us a decline
phase reading, and we would expect Price to retrace some of the
recent gains.
This Morning Briefing is brought to you by 21st Century Alert.
Your 21st Century Alert subscription offers so much more. Go
to our Web site for more information.
http://www.21stcenturyalert.com/
You can find this article on the Web at:
http://www.21stcenturyalert.com/page/tcx/morningbriefing/2003-06-02/
To remove yourself from our mailing list, or to get your
username and password so that you can access the Morning
Briefing archives on our Web site, follow this link:
http://www.21stcenturyalert.com/user/rnunes2/[email protected]
O Clubeinvest.com informa que nenhuma da informação
aqui facultada deverá ser entendida como conselho ou recomendação
de qualquer tipo de transacção ou investimento.
