Zbigniew Piekarski on bears, bulls and bulbs
If I had to sum up in just one word what the year 2003 represented for the markets it would be "risk." Any asset class associated with greater risk did well. We see this in the total return of junk bonds, which turned out to be the top asset class in the debt market. It is also evident in the record push-up in NASD margin debt and the record volume in Bulletin Board stocks. Shares of stocks rated B by S&P outperformed shares with a higher rating of A, and both were eclipsed in performance by shares rated C, which are of questionable financial condition.
Yet the decline from the 2000 top into the October 2002 low was only the first phase of this monster bear market. The rally that has occurred since the October 2002 low has no doubt gone further and lasted longer than anticipated. However, this does not change the fact that this is a bear market rally and therefore it does not change the big picture.
Bear market phases tend to be separated by important rallies. The rally since October is probably the most important rally to date and one that should separate phase one from phase two of this bear market. Once it is complete, phase two will bring new lows.
Throughout most of the rally many of the older market technicians have been warning that this rally has reached dangerous levels and that its end should be near. Yet, the market continued to advance.
Since June the rally was not confirmed by advancing volume which is normally an indication of an annual cycle top and is also an undeniable negative for the market. Yet, prices moved higher.
Classically bearish patterns of a very large rising wedge on the weekly chart appeared, which is normally a warning of a decline to come. Yet, prices moved higher.
From 1982 to the year 2000 the stock markets advanced without seeing one year where the low of the year surpassed the low of the previous year and yet, through that whole period of time, sentiment never reached the pervasive levels of bullishness that we now see after a rally which has failed to take either the Dow or the S&P anywhere near their all-time highs and which, when viewed in light of the Nasdaq Composite prices, remain over 60 percent below the highs of the year 2000.
Currently, in terms of sentiment, the 10-day Daily Sentiment index pushed to 83.9 percent, the second highest reading on record! The 10-day average has been above 75 percent bulls for 22 straight days, an all-time record conviction of bullish sentiment. This should normally be at the top and yet, shares move higher.
The percentage of Bulls to Bears reported by Investor Intelligence are at their highest levels since 1987. To date, the weekly reading of bulls divided by bulls plus Bears has been over 70 percent for 31 consecutive weeks and this has never happened since records began some 40 years ago. Just think about that! We have just recently finished the decade of the 1990s which were remarkably free of anything resembling a bear market and this is the first time that such levels of optimism have prevailed.
Thomson Financial reported record levels of insider sales. These statistics show that in September there was $31.50 worth of insider selling for every $1.00 of insider buying. Normally, tops are associated with insider sales at much lower levels. These are all time high levels. Yet, prices move higher.
So, could it be that we have truly entered a new paradigm and none of the historical indicators work anymore? Will the rally off of the March 2002 low mean that we have to rewrite the history books? Can we now take over 100 years of market history and statistical norms and throw them out as a relic of the past? Does value mean anything? Is technical analysis now meaningless bunk?
My answer remains that this is a bear market rally. It has indeed gone further and lasted longer than almost anyone ever expected. However, it is not so unique that it will rewrite history.
This rally will separate phase I of the bear market from phase II for it has become a speculative mania. Human psychology does not change and the mistakes of the past are always repeated as evidenced by an article in the Financial Times concerning Tulip Bulbs.
In the 17th century the whole of Europe became involved in a craze started by the Dutch that bankrupted nations. It involved tulips whose bulbs fetched prices equivalent to small landed estates. Last year some 200 wise investors parted with a minimum of zł. 477,000 (€100,000) each, for a total of zł. 406 million (€85.2 million), and invested in the NovaCap Florales Future fund, a kind of venture-capital outfit for new tulip types.
It seems the contracts to sell the new varieties were made through a tulip market-maker that has gone bust. NovaCap, for its part, denies it was a speculative vehicle, adding that it reduced investors' risk by investing in bulbs only in the later stages of development.
The youthfulness of the current major bear trend is signaled by the fact that bears have briefly outnumbered the bulls just three times since stocks peaked in 2000: at the lows of September 2001, July 2002 and October 2002. They will do so again. Visit www.gpmanagement.com and find out what the future holds.
On the WSE: Just like the Polish Nation, the WIG20 is undecided and does not know which way to swing. Once the network of students who value connections higher than competencies leads Poland into an economic system whose growth will be slightly above that of Sub Saharan Africa, the issue will be resolved. Remember also that the Chief Auditor of the EU has refused to sign off the Accounts for the past seven years as he does not know where the money goes.
Yet the decline from the 2000 top into the October 2002 low was only the first phase of this monster bear market. The rally that has occurred since the October 2002 low has no doubt gone further and lasted longer than anticipated. However, this does not change the fact that this is a bear market rally and therefore it does not change the big picture.
Bear market phases tend to be separated by important rallies. The rally since October is probably the most important rally to date and one that should separate phase one from phase two of this bear market. Once it is complete, phase two will bring new lows.
Throughout most of the rally many of the older market technicians have been warning that this rally has reached dangerous levels and that its end should be near. Yet, the market continued to advance.
Since June the rally was not confirmed by advancing volume which is normally an indication of an annual cycle top and is also an undeniable negative for the market. Yet, prices moved higher.
Classically bearish patterns of a very large rising wedge on the weekly chart appeared, which is normally a warning of a decline to come. Yet, prices moved higher.
From 1982 to the year 2000 the stock markets advanced without seeing one year where the low of the year surpassed the low of the previous year and yet, through that whole period of time, sentiment never reached the pervasive levels of bullishness that we now see after a rally which has failed to take either the Dow or the S&P anywhere near their all-time highs and which, when viewed in light of the Nasdaq Composite prices, remain over 60 percent below the highs of the year 2000.
Currently, in terms of sentiment, the 10-day Daily Sentiment index pushed to 83.9 percent, the second highest reading on record! The 10-day average has been above 75 percent bulls for 22 straight days, an all-time record conviction of bullish sentiment. This should normally be at the top and yet, shares move higher.
The percentage of Bulls to Bears reported by Investor Intelligence are at their highest levels since 1987. To date, the weekly reading of bulls divided by bulls plus Bears has been over 70 percent for 31 consecutive weeks and this has never happened since records began some 40 years ago. Just think about that! We have just recently finished the decade of the 1990s which were remarkably free of anything resembling a bear market and this is the first time that such levels of optimism have prevailed.
Thomson Financial reported record levels of insider sales. These statistics show that in September there was $31.50 worth of insider selling for every $1.00 of insider buying. Normally, tops are associated with insider sales at much lower levels. These are all time high levels. Yet, prices move higher.
So, could it be that we have truly entered a new paradigm and none of the historical indicators work anymore? Will the rally off of the March 2002 low mean that we have to rewrite the history books? Can we now take over 100 years of market history and statistical norms and throw them out as a relic of the past? Does value mean anything? Is technical analysis now meaningless bunk?
My answer remains that this is a bear market rally. It has indeed gone further and lasted longer than almost anyone ever expected. However, it is not so unique that it will rewrite history.
This rally will separate phase I of the bear market from phase II for it has become a speculative mania. Human psychology does not change and the mistakes of the past are always repeated as evidenced by an article in the Financial Times concerning Tulip Bulbs.
In the 17th century the whole of Europe became involved in a craze started by the Dutch that bankrupted nations. It involved tulips whose bulbs fetched prices equivalent to small landed estates. Last year some 200 wise investors parted with a minimum of zł. 477,000 (€100,000) each, for a total of zł. 406 million (€85.2 million), and invested in the NovaCap Florales Future fund, a kind of venture-capital outfit for new tulip types.
It seems the contracts to sell the new varieties were made through a tulip market-maker that has gone bust. NovaCap, for its part, denies it was a speculative vehicle, adding that it reduced investors' risk by investing in bulbs only in the later stages of development.
The youthfulness of the current major bear trend is signaled by the fact that bears have briefly outnumbered the bulls just three times since stocks peaked in 2000: at the lows of September 2001, July 2002 and October 2002. They will do so again. Visit www.gpmanagement.com and find out what the future holds.
On the WSE: Just like the Polish Nation, the WIG20 is undecided and does not know which way to swing. Once the network of students who value connections higher than competencies leads Poland into an economic system whose growth will be slightly above that of Sub Saharan Africa, the issue will be resolved. Remember also that the Chief Auditor of the EU has refused to sign off the Accounts for the past seven years as he does not know where the money goes.
