Steve Saville on why the bear still has much further to go.
Below is a chart of the S&P500 Index showing the downward-sloping channel in which the index has been moving since the first
quarter of 2000. Notice that every significant rally in the S&P500 Index since March of 2000, with the exception of the July-August
2002 rally, has ended at either the channel top or at a trend-line (the red line on the chart) drawn parallel with the channel top. Notice
also that the rally beginning in September-2001 made two peaks at around the same level, the first in January-2002 at the red
trend-line and the second in March-2002 at the channel top. With the market having recently reached an oversold extreme it is quite
possible that a similar scenario is playing out now, that is, having already hit the red trend-line and pulled back the market might now
move up to the channel top. In this case the 2nd December peak would continue to stand as the ultimate peak of the rally that began
on 10th October, but a major decline wouldn't commence until the S&P500 had first moved back to around 920. However, regardless
of whether or not we get a bounce to the channel top during the next few months the most important point for most people to
remember is that the major trend is still down.
There are a number of reasons why the major trend will remain 'down' until considerably lower levels are reached. Some of these are:
1) In order to get the average dividend yield and price-to-sales ratio to values that are normally seen near the ends of bear markets
the major stock indices will need to fall by at least 50% from their current levels
2) Although fearful in the short-term, most people remain very optimistic with regard to the stock market's long-term performance. That
is, the stock market is still widely considered to be a good place to invest for the long-term. Such optimism has never been seen at
bear market bottoms in the past.
3) Very little money has left the market. In fact, there has been a substantial net addition to equity mutual funds since the major peak
was reached in March of 2000. We doubt that this will turn out to be the first bear market in history during which the public bought all
the way down and was therefore fully invested at the ultimate bottom. Reason no. 3) is, of course, directly related to reason no. 2).
4) During previous bear markets over the past 30 years the percentage of investment newsletter writers who were bearish always
moved well above 50 and remained above 50 for at least a few months before the market reached its ultimate bottom. During the
current bear market the proportion of investment newsletter writers in the 'bear camp' has never been higher than 43%. Currently it is
34%. Obviously, reason no. 4) is also directly related to reason no. 2).
5) The cash levels in equity mutual funds are near all-time lows, indicating that mutual fund managers are a lot more afraid of missing
a rally than they are of catching a decline. These low cash levels mean there is very little pent-up buying power, that is, there currently
isn't enough fuel to spur a new bull market.
6) There have been signs over the past few months that consumers have begun to 'hunker down'. This is very important because the
US economy has been flying on only one engine over the past 2 years and that engine is consumer spending. Furthermore, as
discussed earlier in today's commentary a slowdown in consumer spending is not only likely, it is necessary in order to reduce the
massive US trade deficit.
7) The US Dollar's exchange value against most currencies is headed much lower and this decline in the Dollar's relative value will
eventually prompt the large-scale liquidation of US stocks by foreign investors.
So, while there will be stock market rallies from time to time and while these rallies will, on occasion, be substantial, there is no reason
at this time for long-term investors to be buying, or keeping money in, any mutual funds that tend to move up and down with the
overall stock market. A MUCH better entry point lies in the future (during 2004 or perhaps even later).
Market Data 
Markets 
AI
