Tuesday, August 24, 2004
Early Week Update
Things Looking Better in the Short Term
Last week, the technical indicators flashed maximum oversold and pointed to a rally that would last as long as three weeks. The S&P is poised to challenge 1108-1111, and if successful, the next price targets would be 1123, followed by 1150. A successful challenge of 1150 on strong volume would see the S&P making new highs for the year, possibly in the 1170-1190 range. On the other hand, a failure at the 1108-1111 level that sees the S&P fall apart rapidly in BOTH time AND price would be MAXIMALLY BEARISH and would be a clear-cut signal to sell.
But even though I am short-term bullish on the stock market from a technical point of view, my fundamental view of the market and the economy has not changed. I believe that the months ahead will see enormous pressures being placed on the US economy. The lethal combination of twin deficits (in both the budget and current account), a record level of private sector and household indebtedness, muted employment and anaemic wage growth, coupled with a high oil prices, a rising interest rate environment and the slow-down in the Chinese economy, should result in a recession somewhere in 2005, or early 2006 at the latest. Since the stock market prices in a recession as far as 6 to 9 months in advance, this does not bode well for the medium to long term outlook of the markets.
Intermediate-term, we are still in a downtrend, the recent rally notwithstanding. If the S&P manages to make new highs for the year, it would indeed reverse the intermediate-term downtrend and morph it into a new bull market. Long-term, the uptrend that was initiated in October 2002 has NOT YET been broken. If the S&P rallies on strong volume and makes new highs for the move, the long-term uptrend will be preserved for months to come. On the other hand, a failure of 1108-1111 will most certainly turn the long-term uptrend down and signify the resumption of the secular bear market. Given my long-term bearish outlook of the stock market on a fundamental basis, I would suggest that the S&P is unlikely to reach the 1170-1190 level as this price action would be inconsistent with the pricing in of a forthcoming recession. However if my fundamental view is wrong and the economy is due to grow strongly even in 2005 and 2006, then I would say that a successful challenge of 1170-1190 and a push past 1200 is still possible this year, and certainly very possible next year.
Things Looking Better in the Short Term
Last week, the technical indicators flashed maximum oversold and pointed to a rally that would last as long as three weeks. The S&P is poised to challenge 1108-1111, and if successful, the next price targets would be 1123, followed by 1150. A successful challenge of 1150 on strong volume would see the S&P making new highs for the year, possibly in the 1170-1190 range. On the other hand, a failure at the 1108-1111 level that sees the S&P fall apart rapidly in BOTH time AND price would be MAXIMALLY BEARISH and would be a clear-cut signal to sell.
But even though I am short-term bullish on the stock market from a technical point of view, my fundamental view of the market and the economy has not changed. I believe that the months ahead will see enormous pressures being placed on the US economy. The lethal combination of twin deficits (in both the budget and current account), a record level of private sector and household indebtedness, muted employment and anaemic wage growth, coupled with a high oil prices, a rising interest rate environment and the slow-down in the Chinese economy, should result in a recession somewhere in 2005, or early 2006 at the latest. Since the stock market prices in a recession as far as 6 to 9 months in advance, this does not bode well for the medium to long term outlook of the markets.
Intermediate-term, we are still in a downtrend, the recent rally notwithstanding. If the S&P manages to make new highs for the year, it would indeed reverse the intermediate-term downtrend and morph it into a new bull market. Long-term, the uptrend that was initiated in October 2002 has NOT YET been broken. If the S&P rallies on strong volume and makes new highs for the move, the long-term uptrend will be preserved for months to come. On the other hand, a failure of 1108-1111 will most certainly turn the long-term uptrend down and signify the resumption of the secular bear market. Given my long-term bearish outlook of the stock market on a fundamental basis, I would suggest that the S&P is unlikely to reach the 1170-1190 level as this price action would be inconsistent with the pricing in of a forthcoming recession. However if my fundamental view is wrong and the economy is due to grow strongly even in 2005 and 2006, then I would say that a successful challenge of 1170-1190 and a push past 1200 is still possible this year, and certainly very possible next year.
