An excellent and timely piece of analysis from ContraryInvestor.com
These guys are the best ... been reading them for years.
Ken Wilson _________________
ContraryInvestor.com
Monthly Market Observations, June 2003
Eastern Meditation
The Really, Really Smart Guys?...There is an old saying in certain market circles that goes like this. "The public lost their money in 1929 and 1930. The smart guys lost their money in 1931 and the really, really smart guys lost their money in 1932." Of course the basic message of this little quip is that bear markets do their best to strip virtually everyone of their hard earned wealth. It's just the nature of the game. As folks like Richard Russell have pointed out a million times, in bear markets of generational importance, the winners are those who lose the least amount of their capital. Sure, that sounds a bit doom and gloomy, but it is well worth keeping in mind.
You might remember that in our May discussion, we suggested that both monetary and fiscal support for the financial markets and the economy were about to be taken to championship levels. In the merry month of May we witnessed the passing of a significant tax package. The third in three years. (We simply can't remember the last time something like this happened.) We experienced significant flattening in the Treasury yield curve and a corresponding spike to near new all time highs in mortgage refi activity as actual mortgage rates hit a multi-decade low. Year over year growth in the money supply accelerated nicely in May. We've seen a good amount of recent Fed open market operation activity, although that's really nothing new for these folks. And we've apparently seen the Administration decide that a lower dollar as a potential domestic economic stimulant may not be the worst thing in the world. And to top off all the excitement, a fair majority of equity market participants have raced headlong into the process of convincing themselves that a new bull market has been born. After all, the technical charts are a guarantee of brighter days ahead, in spite of the fact that April witnessed the smallest amount of insider purchases in eight years and May recorded some of the greatest insider selling in a few years at least.
Bear markets are never easy. Then again, neither are bulls. But maybe it becomes especially difficult when the back to back bull and bear markets are of historical magnitude. Almost ironically, the bears became exhausted trying to call the top of the prior equity mania. In like manner, we would expect the bulls to also become exhausted trying to pick the bottom of the equity bear at some point. But so far, the bottom picking challenge is alive and well. Whether what we are living through at the moment is yet another sharp bear market rally, albeit a rally not to be taken lightly, or something of greater magnitude and longevity certainly remains to be seen. A truly new and sustainable bull market from here would be an event of historic proportion as it would have been launched from the highest macro valuation levels ever witnessed in recent history.
As we mentioned, the Fed and the Administration pulling on all the levers of stimulus simultaneously can go a long way toward helping the stock price levitation cause short term. Much like late 1999 and early 2000, excessive stimulus and liquidity literally had no other place to go except the financial markets. Based on the reality of virtually non-existent corporate capital spending of the moment, it's a good bet we are experiencing a bit of a similar situation today. But what has surprised us a good deal lately is that a relatively large number of folks have become absolutely convinced that the technical charts are almost an infallible guarantee of a major cyclical shift in the macro equity markets as of late. Don't get us wrong, we are absolutely convinced of the necessity to marry fundamental and technical analysis in approaching any investment activity, but the almost dogged religious fervor surrounding belief in recent price breakouts above 200 day moving averages, golden crosses of the 50 day moving averages up through 200 day moving average lines, upward crosses on the monthly MACD charts, etc. theoretically confirming an all new bull market gives us a bit of pause. Enough pause to at least suggest being open to exploring historical experiences of similar technical nature in post bubble environments.
For the balance of the article, and graphs ... this is the monthly free piece that was just release yesterday.
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