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I frankly don't give a hoot what the "market " does, as long as things remain
reasonably volatile (i.e. decent daily ranges). However, I'll throw in my two
cents on these issues, and I've chosen to reply to Steven's post, since this
provides for a more interesting contrast:
steven poser wrote:
> John Stevenson wrote:
> > I think I heard him say that the mkt needed a week of big volume, and
> > needed to set new highs above the mid-May intraday high of 9312 or else. .
There's always a lineup of "experts" willing to make these sort of
prognostications. Frankly, most of them are out of touch with how markets really
work, especially those of today. It is silly to even suggest that the volume
this week could affect the market long term.
> > .that mid-May high would represent the "final top" of the astounding Bull
> > mkt we've witnessed for the past 2-3 years, and that a plunge would occur
> > within 107 +/- 5 calendar days from that top.
I saw this, and I wouldn't put a whole lot of stock in it personally. It is
nonsense to say that this could be the "final top." I rely on TA exclusively,
and its value deteriorates over time - anything along these lines would be
nothing more than wild speculation.
> > I think it's high time that ALL investors pull their noses out of their
> > charts for a time, and take a REAL GOOD look at some fundamental questions:
Heck, I've never even held overnight, but I wouldn't be too concerned if I were
an investor. All we have here is a mild pullback within a very long rally, which
is normal. There isn't really anything to suggest that it will be anything but
brief.
> THE CHARTS WOULD PROBABLY AGREE WITH MR. FAVORS. ANYBODY THOUGH WHO IS
> FOOLISH ENUF TO IGNORE THE CHARTS, IS LOSING TOUCH WITH REALITY BECAUSE
> THE CHARTS ARE WHAT THE MARKET IS FEELING.
I agree that charts do tell the story, but if you look at a daily chart of the
SNP, there isn't anything to be alarmed about.
> THE FUNDAMENTALS OF COURSE
> DRIVE THESE CHARTS, SO ONE MUST USE BOTH OR HE/SHE WILL BE VERY SORRY.
No they don't. Only one thing drives charts - supply and demand. Fundamentals
*can* influence this, but only to the degree that capitalization is affected.
You have to realize that there is NO essential connection between stock prices
and fundamentals. Buying and selling (for whatever reason) is the sole direct
force behind price changes.
> THOUGH WE HAVE NOT MADE NEW HIGHS, I STILL THINK THERE COULD BE (SHOULD
> BE) A MINOR NEW PEAK, BUT IN GENERAL, I WOULD BE SELLING RALLIES IN
> STOCKS AS I DO EXPECT A DROP OF 38-62% OVER THE NEXT FEW YEARS IN THE
> DOW. JUST NOT FOR ANOTHER FEW MONTHS.
I'd be *real* careful here, especially of you are shorting them. Long term,
there isn't any reason why stocks can't rise close to their current rate for the
next 10 years at least.
> > 1. Do you believe in the so-called "New Paradigm"?
> > (If you do I think you're probably beyond help at this point, but how can
> > you justify a New Paradigm, and engage in technical anaysis based on models
> > generated from the "Old Paradigm(s)"?)
You can't. Some principles of TA still apply, but ancient data isn't very
valuable anyway, and things certainly have changed in the last few years.
>AS FOR THE NEW PARADIGM, THAT IS A VERY MISUNDERSTOOD TERM. THERE IS NO
> NEW PARADIGM. WE HAVE HAD LOW INFLATION AND STRONG GROWTH BEFORE.
This has little to do with inflation or even growth. The reality of the market
has undergone enormous changes lately - to the extent that there really isn't any
serious competitor for capital anymore. This has been caused partly from a
strong economy, but more so by the scope and magnitude that equity investing has
taken on. Nowadays, just about every Joe is pouring a large part of their income
into the market. People have become addicted to its returns, and now require
them to meet their financial goals. As long as this continues, it will take a
serious economic event to put a real halt to this.
> WITNESS THE 50S AND 60S. STOCKS THOUGH DID NOT DO THIS WELL.
For sure - even the 70's. And the 90's are the best yet. This is mainly because
aggregate capitalization is growing, which is directly related to stock prices
(in the aggregate, they are identical).
> PRODUCTIVITY I THINK,IS UNDER MEASURED, NOT OVER ESTIMATED TOO. I AM
> HUGELY MORE PRODUCTIVE WITH THE NET, EMAIL ETC THAN I WAS YEARS AGO. SO
> THIS IS NO NEW PARADIGM.
Productivity has little to do with this either. However, it is true that
productivity has increased, although perhaps not yours. The only way this would
really affect levels in general though is to the extent it increases overall GDP,
which in turn allows for more inflow into the market.
> AS FOR TECHNICAL ANALYSIS NOT BEING USEFUL IF THERE IS A NEW PARADIGM, I
> WOULD SUGGEST THAT YOU ARE MIXING APPLES AND ORANGES. TECHNICAL ANALYSIS
> IS BASED ON CROWD THEORY AND HUMAN BEHAVIOR AND THAT HAS NOT CHANGED.
It has changed quite a bit, but that's beside the point. Situations are
constantly changing, and TA that worked a year ago may fail miserably today.
There still are some classic principles, such as support and resistance, that
hold throughout, but the "crowds' of yesteryear aren't the "crowds" of today.
> THE NEW PARADIGM SAYS NOTHING ABOUT THIS (AND AGAIN, I DO NOT BELIEVE
> THERE IS A NEW PARADIGM AND I ALSO THINK THE STOCK MARKET IS AT OR NEAR
> A TOP ANYWAY, SO I AM NOT DISAGREEING WITH YOU IN THAT PART OF YOUR
> ANALYSIS.)
What makes you think it's near a top? You have to realize that if more money is
going in than coming out, markets MUST rise. And, IMHO, there really isn't any
good reason to think this won't continue for years to come.
> > 2. What happens, based on historical empiricism, when prices rise, and
> > earnings fall?
Nowadays especially, there really isn't any solid connection between earnings and
prices at all in the aggregate, which is why ratios continue to climb, and this
could continue indefinitely. From the high rate of capitalization, dividends
aren't significant anymore, and neither is competing instruments. Until this
changes, earnings are only significant as a basis for comparing equities.
> STOCK PRICES MUST EVENTUALLY FALL.
Not really. In fact, historically they have always risen long term, and that has
certainly been true lately.
> NOTE THOUGH THAT IF THE MARKET
> ADJUSTS TO LOWER INTEREST RATES IF THAT IS WHAT YOU BELIEVE, THAN PRICES
> CAN RISE FURTHER.
Lower interest rates in itself stimulates higher prices. Higher interest rates
could slow down growth, but probably would be insufficient to reverse things.
> FOR EXAMPLE, BASED ON THE DIVIDEND DISCOUNT MODEL, THE
> PRICE OF A STOCK IS DISCOUNTED BY THE SUM OF ITS EXPECTED DIVIDENDS
This is just a model, and is especially uninformative in the aggregate,
especially today.
> DISCOUNTS BY (1+Y)^N WHERE Y IS YIELD AND N APPROACHES INFINITY. LOWER
> YIELDS RESULT IN HIGHER FAIR PRICES.
This is the way bonds work, but certainly not stocks.
> STILL, THAT IS LARGELY DISCOUNTED
> PROBABLY ALREADY, SO STOCK PRICES SHOULD FALL FAIRLY SOON. AND THAT IS
> WHAT I EXPECT.
I hope you're not betting the farm on this.
> > 3. If the "fundamentals" of the Economy can be reduced to "a low rate of
> > inflation" (as Bulls want us to believe), what about the other
> > "fundamentals" that tell a radically different story? (ie: balance of
> > trade, mkt internals, shrinking profits, chaos in foreign mkts, blazing GDP
> > growth. . .etc.)
This is significant mostly to the extent that a strong U.S. economy can help lure
foreign money, which is happening now. This can easily offset any impact (albeit
more of a perceived rather than real problem) that reduced revenues can present
(as is the case presently).
> INFLATION DISCUSSED ABOVE. BALANCE OF TRADE IS QUESTIONABLE SINCE A
> LARGE PART OF IT IS ASIA AND MUCH OF THAT IMBALANCE IS US FIRMS RE
> EXPORTING FINAL PRODUCTS THAT THEY SHIPPED THE RAW MATERIALS TO ASIA IN
> THE FIRST PLACE (NIKE, INTEL).
I agree that the balance of trade isn't particularly worth mentioning here,
although it can impact sectors - the overall market should not be affected too
much by this.
> CHAOS IN FGN MARKETS ALSO BAD AND GDP GROWTH NOT A PROB IF DOES
> NOT LEAD TO IMBALANCES CAUSED BY INFLATION AND THEN ULTIMATELY LEADING
> TO AN OVERLY RESTRICTIVE FED AND THEN A RECESSION OR WORSE.
I don't really see this happening anytime soon though.
> BUT AGAIN, I
> THINK WE ARE SET UP FOR BIG TROUBLE TO START IN THE NEXT FEW MONTHS AS
> THE BALANCE OF THESE FACTORS ARE CLEARLY NEGATIVE FOR THE MARKET.
There's only one way for the market to suffer long term, and that's through a
significant outflow of capital. Wile the factors you mention could have an
affect on this, I seriously doubt that the effect would be anywhere near enough
to cause the downturn that you are predicting.
> > 4. Does laying off 1000's of workers really constitute an "increase in
> > productivity", or merely a short term boost to the bottom line (and the
> > stock price)
Not to the stock price necessarily. And - this is only meaningful for a
particular stock or sector, and not the market entirely - in other words, what
piece of the overall pie is taken. Laying off the workers doesn't increase
productivity - it is the other way around - increased productivity allows for
layoffs.
> , to be inevitably followed at some indeterminate time by an
> > erosion of product and/or service quality? Is erosion of quality deferred
> > inflation?
Not sure why this would be the case - if there is a connection here, I would
expect quality to improve, since any given quality can be produced or offered
more cheaply than before. This sounds like Union speak <g>. Even if quality did
erode, I'm not sure why you'd think this would have an inflationary impact. In
fact, productivity gains are more likely to curb rather than cause inflation.
> MAYBE THAT WILL SHOW UP AND MAKE THE 38-62% DROP
> THAT I EXPECT, 62-90%, BUT I DOUBT IT IS THAT BAD.
Wow - you are bearish! I really don't think we'll ever see these levels unless
an all-out panic hits - which is very unlikely in my view within the next few
years. 10 or 15 years down the road, when the baby boomer withdrawal really
starts to hit, it may be another story.
> > 5. Do the PPI and CPI really measure inflation (defining same as: an
> > erosion of purchasing power due to an expansion of the money supply), or
> > have they become easily manipulated tickets to popularity for politicians,
> > and sales tools for Mutual Funds?
For the most part they do - especially CPI - the PPI is used as a leading
indicator for it. The main reason people invest, though, is that it is required
to fulfill their long term financial plans - they are not trading on the basis of
the CPI for the most part anyway.
> NO IDEA. I TEND TO THINK THAT PPI/CPI UNDER REPORT INFLATION NOT OVER
> REPORT AS THE BOSKIN COMMISSION WOULD HAVE US THINK.
I tend to agree with this - but I think that it is probably best in terms of
fiscal policy that it remain unchanged.
> BUT, REMEMBER THIS.
> WE TEND TO REMEMBER BAD THINGS LIKE PRICE INCREASES, MORE THAN WE
> REMEMBER PRICE CUTS. HOW MUCH CHEAPER IS THE COMPUTER U SENT THIS
> MESSAGE ON NOW THAN IT WAS SIX MONTHS AGO (MINE IS DOWN 40-70%). AND
> THINK ABOUT THE REALTIME DATA DISCUSSION WE'VE BEEN HAVING. IT IS HUGELY
> CHEAPER NOW THAN A FEW YEARS AGO!!!
Not really - it's better though. It costs more and more for the best technology
- I end up paying more and more for computers <g> - and they become pretty much
obsolete in a year or so.
> JOHN - BASICALLY I AGREE WITH THE IDEA THAT THE MARKETS ARE DUE FOR BIG
> TROUBLE (STOCKS ESPECIALLY). THE BASIC REASON IS THEY ARE OVER VALUED
> BASED ON ANY REASONABLE MEASURE AS U SUGGESTED. WHERE I DISAGREE IS
> SIMPLY ON BLAMING IT ON MISINTERPRETATION OF INFLATION DATA, THE
> SO-CALLED NEW PARADIGM, OR USING CHART ANALYSIS. GOOD WORK. CANNOT WAIT
> TO SEE OTHER RESPONSES.
What do you mean overvalued? Prices are always valued fairly efficiently - which
is what people are willing to pay for them. Again - there is NO necessary
connection between prices and earnings in the aggregate.
In conclusion, we cannot properly gage long term market trends by relying on
either dated charts or tangential factors. Supply and demand, and the factors
that contribute to them directly, and the degree of these effects, remain the
sole valid way to arrive at an accurate picture of trends, and this is all the
more true today.
Regards,
A.J.
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