Dateline: 09/10/99
Is it déja vu all over again? Are we in for a repeat of 1987 when the stock market took a big nose dive in October? Many of the signs are similar say some analysts. Moore Research Centre has been doing correlation studies between 1987 and today's markets and their graph shows a 91% correlation.
October has a notorious reputation because both Black Thursday, the Dow drop in 1929, and Black Monday, the 1987 crash, happened in that month. Last year pundits correctly predicted a market downturn in the fall, but didn't predict the bounce back. Seems the late summer and early fall have become bear hunting season. Everyone gets edgy and fears the worst.
This year has a new wrinkle - Y2K. National Post columnist Jonathan Chevreau and financial advisor Stephen Gadsden recently launched their book Krash: How Y2K Could Sink the Stock Market and What Canadians Can Do About It. I'll review the book in detail here next week, but suffice to say that calling them extreme pessimists is an understatement. They make the analogy of the stock market and the Titanic. The market is headed for an iceberg. And that iceberg is Y2K.
While not apocalyptic End of the Worlders like some Y2K pundits, they nevertheless think the market fallout will not be pleasant. And they think it may be of significant duration.
Two analysts I follow who look at various indicators to determine the health of the market are fairly cautious right now. Carlton Lutz of the Cabot Market Letter has his readers 20% in cash right now. And he urges caution on any new purchases. Selectivity is the key, nevertheless, he has buy recommendations on five different stocks and holds on a number of others.
Lutz is a momentum analyst on individual stocks who uses broad market indicators to determine whether an aggressive or a cautious stance is advised. One of his key indicators is the number of new lows on the New York Stock Exchange. If the number of daily new lows stays below 40, it is a bullish indicator. If not, caution is advised. Currently the new lows have topped 40 since early July.
Another indicator is the NADAQ Advance-Decline line. The number of declining stocks is still outnumbering advancers on a regular basis. The broad market is still weak. For Cabot's X-Ray Indicator to go positive, the NASDAQ Advance-Decline line must move above its 40 day moving average, and preferably above the 70 day moving average as well.
And finally, the interest rate environment is still poor. Cabot's interest rate measuring Power Index has been negative most of this year.
The only positive note is that the long term Dow Jones trend line remains strong.
Another analyst is Jeff Walker of Lowrisk.com. Walker uses an indicator he calls the Lowrisk Market Allocation Model to determine market strength and investment mix. The model generates a number between 1 and 20 depending on the computer analysis of a variety of market indicators. (Visit the website for a detailed description.) 1 is extremely bearish and 20 extremely bullish. Currently (as of Aug. 30) the model signal strength is at 9, up from 8 in mid-August, but down from 16 on Aug. 2.
Walker developed four different investment strategies depending on a person's particular risk tolerance. The extremely conservative SuperBear Strategy is 100% in money market funds and has been since mid-December. The aggressive Disaster Avoidance Strategy has been 100% in stocks since April 21, 1994. The indicator has to reach an extremely bearish level of 3 to move that strategy into cash.
Of the in-between strategies, his Timing Strategy is 100% in cash and his Graduated Strategy is 50% in cash, 50% in stocks. His Graduated Strategy is the one I find the most useful. Walker, incidentally, offers a free emailed newsletter to keep you up to date on market.
What do I think will happen? I'm an optimist by nature, but also a realist. I agree with Carlton Lutz that selectivity is essential. Last year when the market dipped, bonds and gold did well, so positions in those might be a good hedge today against a possible downturn.
Bear
Necessities Net Links -
my collection of links and articles about Bear Markets.
Black
Thursday - Student Mark
Underwood compiled this look at the 1929 market crash while at
the University of Kentucky in 1996. Interesting for its
collection of headlines from the New York Times for the period
leading up to the crash, during the crash and afterwards.
Futures
Fax - Another website with a
decidedly bearish outlook based on comparison of 1987 and 1999
markets.
Crash
Index - World Wide
Financial Network has an index updated daily of the likelihood of
a market crash.
The
Bad News Bears -
A two part series looking at bear markets through history and
safeguards for your portfolio.
Bear
Market Hedging -
One of my articles from last year outlining an investment
strategy for possible bear markets.
Grin
and Bear It! - An
article I wrote last year in the wake of the market downturn.
Links to some interesting articles from Canadian Business
on bear markets.
A
Year to Kill -An
article I wrote in January that gives an overview of Y2K with
lots of links to other resources.
Comments? Suggestions? Why not post them on our Bulletin Board or email me.
E-mail me!
09/08//99 - Treasure
on Your Bookshelf
Got some dusty tomes on your bookshelf? They may be worth some
cool cash!
09/06/99 - Internet
Update: Travelbyus.com Profiled
Along with our Movers & Shakers list and updates to our
Internet indices, we profile Travelbyus.com.
09/03//99 - Island
in the Sun - Part 3: The Development
Getting through the bureaucracy was a struggle. Here's how it was
done!
09/01//99 - Island
in the Sun - Part 2: The History
A brief economic history of Hardy Island.
08/30/99 - Internet
Update: medEra Life Science Corporation Profiled
Along with our Movers & Shakers list and updates to our
Internet indices, we profile medEra Life Science Corporation.
Disclaimer: I'm not an investment advisor, but rather, a financial journalist. You should consult an investment professional before making any investment decisions.
Currently reading: Krash: How Y2K Could Sink the Stock Market and What Canadians Can Do About It by Stephen Gadsden and Jonathan Chevreau. I'll be reviewing it here shortly, maybe next week, but I am a slow reader. It's about time for a Y2K update! (Especially since 9/9/99 fizzled!)
Also I recently received a letter from someone who's company is now engaged in a lawsuit against UCC Total Home, the company I wrote about here in June. Seems there's also a class action lawsuit against the company. I'll be doing a follow-up on that article as a result of this new information.