Zeev's Turnips Patch-No Politics (ZEEV)

[Train Guy]

Here's some of the posts about it, #msg-1674229, #msg-1636979, #msg-1630289, #msg-1625730, #msg-1621616. Oh, and his name is Michael Belkin. Doing a google search, not coming up with anything current since the Oct stuff. This is interesting though.

BELKIN REPORT . 2002 Belkin Limited All Rights Reserved November 24, 2002
Trend Analysis and Model Forecast Suggest Further Rally Ahead

Stock indexes are probably poised for substantial gains over the next 3-6 months. This bear market rally should be bigger than any bounce of the past 2 1/2 years.

Stock indexes are mean reverting processes over the long term. Two examples are the Nikkei Average (1968-1990) and S&P500 (1976-2000). Each index was in a long-term uptrend during those periods. A 200 week moving average is a way to analyze trends. Stock index long term uptrends remain above rising 200 week averages. During long-term uptrends (decades), stock indexes typically begin rallies from the vicinity of the 200 week average, often starting during a recession before any economic rebound is evident. The rally continues for several years, pushing the stock index to a minor deviation from trend (200 week average). After a several-year-long rally, the stock index peaks and declines back to the vicinity of its rising 200 week average (usually during a recession). That pattern repeats over and over during a decades-long uptrend -- up three years, down 1 year, or endless variations of that pattern (see next chart page). What investors perceive as bull markets (3-4 years) are simply upward deviation from trend -- and what investors perceive as bear markets (1-2 years) are simply reversion to mean, during a decades-long uptrend.

At the end of a decades-long uptrend, bubbles develop (1929 DJIA, 1989 Nikkei, 2000 Nasdaq). Stock indexes go to greater (and unsustainable) percentage deviation from trend. Market participants get careless. Remembering only the long-term uptrend of the past many years, they throw caution to the wind. Go-go mutual funds advertise 25% annual returns for the past five years. The financial industry prostitutes itself. Stock analysts hype companies they despise for the sake of their year-end bonus. Prominent strategists invent Mickey Mouse valuation models to rationalize the market’s overvaluation and feed the bubble frenzy. Companies with half-baked business models are showered with IPO and private equity capital. Governments reap capital gains tax windfalls and think budget surpluses will last forever.

Then the bubble bursts. In the first decline, the stock index drops to its 200 week average (just like in the long term uptrend). But this time (after a bounce), the index drops decisively below its 200 week average, for the first time in decades. The 200 week average rolls over, led lower by the index below. Now it is a long-term bear market -- the exact opposite of the previous experience. Trend deviation is to the downside (in market collapse phases) and mean reversion is back up to the declining 200 week average (in bear market rallies).

Consider the Nikkei example. After breaking below its 200 week average (in 1990), the Nikkei plunged 46% below the 200 week average when it bottomed (temporarily) in August 1992 (2 1/2 years into its bear market). The level at which the Nikkei ended its initial 2 1/2 year collapse phase was near its 200 month average (see chart -- 14800, August 1992).

The principle of trend deviation and mean reversion applies in the much-longer term monthly periodicity as well as the weekly periodicity. When the Nikkei reached its 200 month average, it stabilized and had a 42% rally over the subsequent year. Guess where that rally ultimately reached? The declining 200 week average. Simple concept. Trend deviation gets extreme to the downside in a bear market decline, the index bottoms near its 200 month average -- and the subsequent bear market rally reaches the declining 200 week average.

The Nasdaq and European stock indexes reached their 200 month averages in early October (see charts). At that point, The Nasdaq was 56% below its 200 week average and the Dax was 52% below (versus 46% for the Nikkei at its 1992 bottom). That October 2002 low for European and US stock indexes is similar to the Nikkei low of August 1992, which signaled the end of a plunging market and the beginning of a trading range marked by substantial rallies.

The model forecast now points up (intermediate and long term) for the Nasdaq, tech industry groups and most global stock indexes. This is a stronger signal than for the Nikkei in August 1992 -- that was a real-time upward forecast made to hedge funds when we first started this business 10 years ago.

The declining 200 week average upward target for this rally is far above current levels (Nasdaq 100 NDX +100%, Dax +70%). It took the Nikkei a year or more to reach its 200 week average level, so those are longer term targets. In the meantime, there will certainly be volatility -- but stock indexes should head higher.

Markets and industry groups with the biggest upside potential are the ones that have collapsed the most (Dax, Cac, Tech). Defensive positions should underperform in this bear market rally.

The fundamentals or valuations aren’t there to support a bull market. But that doesn’t mean a big bear market rally can’t happen. We aren’t like Blodgett or Abby Joe -- telling you to buy crap for the sake of our bonus. We are simply pointing out that normal bear market dynamics could soon produce a rally of bigger proportion than most market participants can currently imagine.
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And you have to love this quote.

-- Does it sound weird to forecast an equity market rally in the face of such sick fundamentals? Yes. But we don’t run the asylum. We just try to stay out of the path of the stampeding inmates.

http://www.mondialepartners.com/includes/content/providers/BelkinIntro.pdf