Zbigniew Piekarski debunks various theories that the markets will rebound despite January's lows
I don't know why investors always get bullish after the New Year. Seasonal market dynamics are usually given credit for the rise in stock prices.
I think it's seasonal psychology. The idea that you start the New Year with a clean slate is pretty entrenched in our psychology. That's why we make so many inane New Year's resolutions.
But it never takes long before we realise that simply erasing the slate isn't enough. For my part, I know I'm usually chain-smoking by the third working day and finding excuses why I cannot go to the gym by the third working week.
The fact that the market ended down for January is a negative omen for the year, according to the "January barometer" theory. This theory is based on the idea that "as January goes, so goes the year." We can think whatever we wish about such a simplistic idea, but the fact is the January Barometer track record has been impressive. The barometer's inventor, Yale Hirsch, has published the "Stock Trader's Almanac" since 1937, and for 66 years it has had a perfect record in predicting market direction in odd-numbered years. Anything with that kind of track record can't be ignored.
The "January effect" theory has also failed. This calls for small-cap stocks to outperform large stocks at the start of the New Year, which often continues well into the spring. This January effect started in November and disappeared during January with the small-caps underperforming for the entire month.
Oh, I know - it's the fault of the "geopolitical situation" and "war worries," and once these go away then everything will be OK. But should this be the case, then why did European bourses lose more than the American ones in January? One can understand why the Footsie 100 lost 9.47% in the month, having the worst January since its inception in 1984, as the British support an invasion of Iraq, and at the last count, have more than 1,000 Al Qaeda recruits hiding in the country.
But why were the Dutch and Belgian bourses (-8.61% for the AEX and -7.04% for Belgium) far lower than exchanges in Germany (-5.01%) and France (-4.11%)? And why were the DJIA (-3.45%) and S&P 500 (-2.74%) showing the least losses? Even the respected Frankfurter Allgemeine Zeitung said that the fall of the DAX was the direct result of a fear of war even though the Germans cannot afford to send any troops anywhere.
So my statements that the present and future declines in the bourses has nothing to do with the war must be incorrect. Let us, then, look at another predictive system, one that is based on 4,701 years of cultural history - the principles of feng shui, the ancient system of environmental placement - and I Ching, the 2,000-year-old law of the universe, which relies on use of the five elements (metal, wood, water, fire and earth).
Y.C. Sun, a geomancer by tradition and training, who practises in San Francisco and boasts of having a very famous client list, predicts gains of as much as 22% for the three major indexes, with the DJIA going as high as 9,780. He also sees the Nasdaq Composite rising as high as 1,700 and the S&P 500 hitting a peak of 1,050. Sun sees history on the side of the ram (goat or sheep). In 1955, or the year of the so-called forest ram, the Dow gained 21% and in 1991, the year of the golden ram, the blue-chip benchmark rang up a 20% gain, he said.
I have examined this phenomenon and found that he does not mention 1931 when the DJIA fell more than 50%, 1943 when it rose by 12.5% or 1967 and 1979 when it was relatively flat. In addition, before I rely on Sun's predictions and alter my investment stance, I would like to know why such a long-standing culture is unable to distinguish between a goat and a sheep.
As everyone must know the goat as a domesticated ruminant has served mankind earlier and longer than cattle and sheep and can survive on bushes, trees, desert scrub and aromatic herbs, when sheep and cattle would starve to death. In other words, it can survive in times of adversity. A sheep, on the other hand, gets shorn, as have all the "longs" over the past two years.
The reference to the ram, therefore, is very prescient at this time for the current generation of economists, analysts and investment managers who still believe that the worst is behind us and will only remember the heights that the markets reached in 2000, telling their grandchildren of their few successes and not of their many failures. (The modern meaning of RAM is Random Access Memory).
Between 1972 and 1975, stock prices in Britain, France and Italy suffered falls of almost 80%. Stocks in the US and Germany dropped about 60%. Those were times of high inflation. If we take inflation into account, then the British market took until May 1987 to recover in real terms, a wait of 15 years. The US market took until August 1993, a wait of 21 years. The Canadian market took until October 1996, a wait of 24 years. And this was only a small contraction in Elliott Wave terms.
However, this is still a longer time-frame than most institutional hacks can account for or even remember.
This week's joint report from ABN Amro and the London Business School spells out the dramatic cost of the past three years of share-market falls, putting the losses worldwide at $13 trillion and adding, "That is $2,000 for every man, woman and child on the planet."
Zbigniew Piekarski is a portfolio manager based in Warsaw. He can be e-mailed at zbigp@bipnet.pl.
I think it's seasonal psychology. The idea that you start the New Year with a clean slate is pretty entrenched in our psychology. That's why we make so many inane New Year's resolutions.
But it never takes long before we realise that simply erasing the slate isn't enough. For my part, I know I'm usually chain-smoking by the third working day and finding excuses why I cannot go to the gym by the third working week.
The fact that the market ended down for January is a negative omen for the year, according to the "January barometer" theory. This theory is based on the idea that "as January goes, so goes the year." We can think whatever we wish about such a simplistic idea, but the fact is the January Barometer track record has been impressive. The barometer's inventor, Yale Hirsch, has published the "Stock Trader's Almanac" since 1937, and for 66 years it has had a perfect record in predicting market direction in odd-numbered years. Anything with that kind of track record can't be ignored.
The "January effect" theory has also failed. This calls for small-cap stocks to outperform large stocks at the start of the New Year, which often continues well into the spring. This January effect started in November and disappeared during January with the small-caps underperforming for the entire month.
Oh, I know - it's the fault of the "geopolitical situation" and "war worries," and once these go away then everything will be OK. But should this be the case, then why did European bourses lose more than the American ones in January? One can understand why the Footsie 100 lost 9.47% in the month, having the worst January since its inception in 1984, as the British support an invasion of Iraq, and at the last count, have more than 1,000 Al Qaeda recruits hiding in the country.
But why were the Dutch and Belgian bourses (-8.61% for the AEX and -7.04% for Belgium) far lower than exchanges in Germany (-5.01%) and France (-4.11%)? And why were the DJIA (-3.45%) and S&P 500 (-2.74%) showing the least losses? Even the respected Frankfurter Allgemeine Zeitung said that the fall of the DAX was the direct result of a fear of war even though the Germans cannot afford to send any troops anywhere.
So my statements that the present and future declines in the bourses has nothing to do with the war must be incorrect. Let us, then, look at another predictive system, one that is based on 4,701 years of cultural history - the principles of feng shui, the ancient system of environmental placement - and I Ching, the 2,000-year-old law of the universe, which relies on use of the five elements (metal, wood, water, fire and earth).
Y.C. Sun, a geomancer by tradition and training, who practises in San Francisco and boasts of having a very famous client list, predicts gains of as much as 22% for the three major indexes, with the DJIA going as high as 9,780. He also sees the Nasdaq Composite rising as high as 1,700 and the S&P 500 hitting a peak of 1,050. Sun sees history on the side of the ram (goat or sheep). In 1955, or the year of the so-called forest ram, the Dow gained 21% and in 1991, the year of the golden ram, the blue-chip benchmark rang up a 20% gain, he said.
I have examined this phenomenon and found that he does not mention 1931 when the DJIA fell more than 50%, 1943 when it rose by 12.5% or 1967 and 1979 when it was relatively flat. In addition, before I rely on Sun's predictions and alter my investment stance, I would like to know why such a long-standing culture is unable to distinguish between a goat and a sheep.
As everyone must know the goat as a domesticated ruminant has served mankind earlier and longer than cattle and sheep and can survive on bushes, trees, desert scrub and aromatic herbs, when sheep and cattle would starve to death. In other words, it can survive in times of adversity. A sheep, on the other hand, gets shorn, as have all the "longs" over the past two years.
The reference to the ram, therefore, is very prescient at this time for the current generation of economists, analysts and investment managers who still believe that the worst is behind us and will only remember the heights that the markets reached in 2000, telling their grandchildren of their few successes and not of their many failures. (The modern meaning of RAM is Random Access Memory).
Between 1972 and 1975, stock prices in Britain, France and Italy suffered falls of almost 80%. Stocks in the US and Germany dropped about 60%. Those were times of high inflation. If we take inflation into account, then the British market took until May 1987 to recover in real terms, a wait of 15 years. The US market took until August 1993, a wait of 21 years. The Canadian market took until October 1996, a wait of 24 years. And this was only a small contraction in Elliott Wave terms.
However, this is still a longer time-frame than most institutional hacks can account for or even remember.
This week's joint report from ABN Amro and the London Business School spells out the dramatic cost of the past three years of share-market falls, putting the losses worldwide at $13 trillion and adding, "That is $2,000 for every man, woman and child on the planet."
Zbigniew Piekarski is a portfolio manager based in Warsaw. He can be e-mailed at zbigp@bipnet.pl.
