Surely A Large Human
Date registered: Jun 2006
Vehicle: '08 C219
Location: Between Earth and Mars
Mentioned: 3 Post(s)
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This downturn has just begun
Commentary: A market stabilization will be short-lived
By Thomas Kee
Last update: 12:01 a.m. EDT Oct. 1, 2008
LA JOLLA, Calif. (MarketWatch) -- Last month, in anticipation of a volatile September, I recommended a proactive risk controlled trading strategy designed to make money during volatile market conditions.
Our proactive automated and correlated Market Timing and stock selection tool using ProShares UltraShort QQQ and ProShares Ultra QQQ with balanced risk control worked well. I hope you adopted a similar strategy for September.
The destruction of Fannie Mae, American International Group, Lehman Brothers and Merrill Lynch and the reorganizations of Goldman Sachs and Morgan Stanley have left everyone on edge. However, the government has come to the near-term rescue -- at least, they were coming when this article was written. If they indeed pass the resolution currently on the table, the market should stabilize. I expect they will.
Going forward, although I believe a near-term bottom is in place, a concise understanding of longer-term trends is important. I'll start by offering an idea for October, and follow that recommendation with a review of my longer term market analysis. The Investment Rate is, in my opinion, the most accurate leading longer term economic and stock market indicator ever developed. It is my longer-term analysis, and I welcome your thoughts and comments on this subject after you review the analysis.
First, because I believe a near term bottom is indeed in place, I am interested in buying the market again. Technology is relatively sheltered from the financial crisis, and although a global slowdown has occurred, tech may be a good place to look if indeed the market starts to turn higher as I expect. Avoid financials for now because of the lingering concerns, and expect QLD to perform well in September. My upside target is near $80.
Be careful though. If the increases occur as I expect, many investors might feel comforted that the global credit crisis has been stymied and a long-term recovery had begun.
Not so fast
The recent downturn in our economy is rooted much deeper than the credit crisis. The mortgage-related mistakes were a near crippling by-product of the greed allowed to compound during the past administration, but they do not provide insight into the future demand for investments. In fact, most people believe, once this credit crisis is behind us, buyers will rush back into the market again and the economy will restore itself. This might cause some people to try to get ahead of this anticipated curve.
If you are trying to get ahead of a long-term rally, think again.
Indeed, I expect a short-term rally, but afterwards I expect significant declines. This forecast is based on the findings of the Investment Rate.
The Investment Rate measures the demand for investments over long-term cycles.
From 1900 to today, the economy and the stock market have followed the trend of the Investment Rate perfectly. The Investment Rate is a demographic analysis of investment demand on a consumer level. Many economists might argue that demographic analysis is not applicable to market cycles, and we would agree that a demographic analysis is not applicable to short-term cycles. However, from a long-term standpoint, demographics are all that matters to the economy and to the stock market.
The Investment Rate measures demand and forecasts directly to market cycles.
For example, if demand is increasing over extended periods of time, over the course of many years, we could rationally assume that the market and the economy will fare well. In fact, this has been the case since 1981. Every year, between 1981 and 2007 the demand for investments increased annually. More people had money to invest, and reason to invest it at the same time. During that upward sloping cycle in the Investment Rate market declines and economic downturns were short lived, buy-and-hold strategies worked extremely well for passive investors, and buying the dips made sense religiously. This was true during every major down cycle, including the "crash" of 1987.
However, at the end of 2007 the upward sloping cycle which began in 1981 came to an end. A new era began at the end of 2007, an era representing diminishing demand for investments going forward. The Investment Rate identified this in 2002, when it was first offered to the public. You can find a complete copy through Reuters Research if you have an institutional account, or find a summary analysis in the link below.
Incidentally, progressive declines in the slope of the Investment Rate, which represent declining demand annually over extended durations, have only occurred twice before in history. The first was the Great Depression. The second was the Stagflation period of the 1970s.
The declines that began at the end of 2007 relate directly to the Great Depression and the Stagflation period of the 1970s because, in all three instances, overall demand for investments on a consumer level was shrinking. The average duration of a major down cycle is 11 years.
The third major down period in history has only just begun.
Back to Economics 101. If demand declines and supply remains the same, prices fall. During all three down cycles, economic problems mounted and the stock market came under severe pressure, while demand for investments declined broadly. These are direct correlations that most market analysts and economists do not recognize. This is the root of the problem in our economy, and it is unavoidable. All we can do is try to lessen the blow. Unfortunately our government is very late to the game and probably incapable of providing shelter from the hurricane that lies ahead. But individual investors can still make proactive decisions.
Don't get caught holding the bag
In the middle of 2008, serious concerns exist. This time, however, the result could be much worse. The risk of a Greater Depression is real, and it is based on declining demand and debt levels, not on the mistakes of our greed-stricken institutions.
Read the summary of the Investment Rate.
Note: Although institutions do control the market, they are empowered by the consumer through investments in mutual funds, 401ks, and other similar investment vehicles.
Kee has recommended QLD to his clients.
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