• 287 days Will The ECB Continue To Hike Rates?
  • 288 days Forbes: Aramco Remains Largest Company In The Middle East
  • 289 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 689 days Could Crypto Overtake Traditional Investment?
  • 694 days Americans Still Quitting Jobs At Record Pace
  • 696 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 699 days Is The Dollar Too Strong?
  • 699 days Big Tech Disappoints Investors on Earnings Calls
  • 700 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 702 days China Is Quietly Trying To Distance Itself From Russia
  • 702 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 706 days Crypto Investors Won Big In 2021
  • 706 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 707 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 709 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 710 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 713 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 714 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 714 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 716 days Are NFTs About To Take Over Gaming?
Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Prieur du Plessis

Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in…

Contact Author

  1. Home
  2. Markets
  3. Other

Stock Markets: Which Way Jose?

The list of well-known names identifying value on the US stock market at current levels is growing by the day and includes the likes of Jeremy Grantham (GMO - "Careful buying is justified"), Warren Buffett ("Buy America. I am"), John Hussman (Hussman Funds - "Why Warren Buffett is right" and "How low, how bad, how long?") and Barry Ritholtz (The Big Picture - "Another buy in"). Even perma-bears such as James Montier and Albert Edwards (Société Générale - "Turning more bullish") are increasing their equity exposure, albeit only for the short term.

Edwards sees the S&P 500 Index finally bottoming at 500, Grantham expects an "overrun on the downside" to between 585 and 780, and Hussman "hopes" for a bottom between 600 and 780. Bennet Sedacca ("Living on a prayer" and "What would it take for me to become bullish") similarly has an index level of 500 to 600 in his sight.

In the meantime, the S&P 500 has been forming a so-called "descending triangle" since the middle of October. A triangle usually is a continuation pattern, i.e. when its occurs in a downtrend the break is usually on the downside. Based on technical analysis, such a breakout would imply a downside target of about 680.

On the other hand (as a good economist will say), if a downside breakout does not occur and we see a reversal to the upside, a strong countertrend rally could surprise investors.

Marc Faber, author of the Gloom, Boom & Doom Report, sees such an eventuality as follows: "... when based on some factors (technical and fundamental) a market is supposed to break out in one direction (up or down) and the breakout does not occur or fails, a very strong countermove usually gets under way. For what it's worth, I covered all my short positions before Tuesday's (November 4) almost 900 points rally [on the Dow Jones Industrial Index] and increased my equity exposure to 10% of my assets. I would consider a move above 900 for the S&P 500 to be a confirmation that a temporary low is in place."

However, Faber cautions: "... the call for a temporary rebound (lasting three to six months and up by 20% or so) does not imply that we have seen the ultimate low - although I would not rule it out entirely in nominal terms. But it is unlikely that we are even close to a major low in real terms! In fact, in real terms the market would seem to have further considerable downside risk."

The long-term inflation-adjusted graph of the S&P 500 Index is provided below, courtesy of The Chart Store. This rather ominous-looking picture shows that the real S&P 500 has already breached its 2002 low.


Source: The Chart Store

Although the venerable Richard Russell (Dow Theory Letters) claims that "neither the duration nor the depth of a primary movement can be forecast in advance", he does caution about the great false rally that followed the 1929 crash. "That deceptive rally took the Dow in April 1930, back to within 60 points of the 1929 peak. Following the April peak, the market crumbled as the Great Depression started. In view of that example, I will be very careful and suspicious of any large-scale advance from here. The quality of any rally from here should be examined minutely for any discrepancies," said Russell.

In short, stock markets seem to be on a knife edge and the closing lows of October 27 (8,176 on the Dow Jones Industrial Index and 849 on the S&P 500 Index) are key levels on which to keep an eye. Suffice to say that extreme caution is still the recommended course of action.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

 

Back to homepage

Leave a comment

Leave a comment