Joe Granville, technical analyst, and author of the Granville Market Letter, has been calling market cycles with a very respectable record for more than 40 years. Today he explained his current view on Bloomberg. A 4000 point drop is incomprehensible to those who do not understand the climate of a secular bear. To those that do, this type of retest of the prior cycle lows (tested in 2003 and 2009) is always within our realm of downside risks. Watch the Bloomberg clip here.
Follow
____________________________
;
after hearing that maybe I’ll keep my S&P puts open a little longer that I was thinking. I was thinking a drop of only 30 points or so and then we work higher.
Another squiggly line analyst has a different opinion…..the thing about technical analysis is the analyst has to be open to an abrupt change of course should the chrts indicate …..presumptions about what is likely to happen in the long run is not helpful in the short term.
“The Bull Market is confirmed”
“A technical analyst will ever rely on one indicator to make a technical call. The key is to use other unrelated studies – so if you use simple moving averages do not use the MACD and if you use a simple rate-of-change to not use another momentum study and so on
The technical evidence to support the call for a new 2012 – 2013 bull market is compelling. Long term cycle work and the simple 50 and 200 day MAs are positive. The short 2011 bear has completed a perfect Fibonacci retracement of the 2008 – 2011 bull and now we have the NYSE advance decline line breaking out. So don’t listed to those doom and gloom idiots – get long and enjoy and most of all avoid those gold bugs”….Bill Carrigan
http://gettingtechnicalinfo.blogspot.com/
Interesting. I’ve been watching Granville’s progress over the past 30 years and he is quite amusing. His Bermuda Triangle analogy always stuck out. You know, where you are flying upside down but don’t realize it. Then you pull up on the joystick and smash into the ocean. The point was that the indicators are all kaput, which is what Danielle has been alluding to with all the QE’s and such. Everything is distorted. Unemployment, who knows? Real inflation, nada. Rates?
I actually ran across one of his classic books in the local library donation bin. Written in 1969 it was/is a classic on market timing to your advantage. I actually refer to it on occassion. Granville wrote another interesting classic ‘Granvilles Last Stand’ which took a few hits at IBDs William Oneil and how great stocks run out of gas when they are topping out. Like US Surgical. The point being watch out because you are most likely to get hit when you are comfy and complacent. Like some are getting to be currently. On the MarketSmith site, check out the blogs. Even the pro’s are getting extremely cautious and itch trigger fingers.
Granville might be right again. Like 1981? 🙂
The call is about a 31% drop. It is not outlandish. Consider:
CAPE fair value on the SP500, the Q Value and a call by Jeremy Grantham based on earnings peaking, indicate fair value for the index of about 950 or lower. This is 28% below and more. These calls are fundamental macro.
I look at it from a more fundamental micro and technical perspective.
1098 is the first support level on a weekly basis, 939 is secondary support if 1000 is breached.
For 950 at the current multiple we need earnings of about $75. This is a 25% contraction give or take. If the multiple contracts to say 11, which is possible for a variety of reasons cited below, we need earnings of $86. This is just a 14% contraction. If it comes it will be a combination of earnings and multiple contraction – let say $82 earnings and an 11.6 multiple.
The earnings contraction could come because of Europe, which is just a bomb waiting to go off, or just because profits have peaked and earnings projections are currently overstated – they are historically at this time in the cycle by around 25% (I’ll find the link to the study if anyone is interested).
Look out for below 1000 on SP500. It could be a great buying opportunity.
Low price earnings ratios could be the norm going forward – Why? Usually with low interest rates the p/es would be higher but rates are low for a reason and also are being kept low artificially with great externalities such as penalizing savers and retirees.
Higher taxes on the horizon imply lower p/es. New economics research indicates this expectation can be powerful.
People are moving out in duration in order to get yield. Stocks are longer duration because they discount relatively far into the future but the low growth prospects of the economy imply higher discount rates and therefore lower p/es. In a market where p/e’s are declining the market often does poorly. However when the bottom of p/e’s is reached its a good buying opportunity over the long term. These could be p/es at 10 and below.
The real interest rate is very low and this is often a leading indicator of p/es for the market… implying p/es have potential to drop even more. So if interest rates are cut around the world it may mean that the stock market will not respond as it has in the past.
Low p/es mean the market may not have the potential to grow rapidly in the next year. p/e can go down to 11.6 because this is the average level that it goes to over the past 140 years when interest rates are negative.
All this adds up to tremendous vulnerability to shocks and a lower growth trajectory.
Those blow out apple numbers combined with a dovish fed tomorrow will push this market higher than anyone thought. You can forget about any meaningful correction for a while now.
Hey Dave
I agree – except for Apple. I would place my bets toward modest upside, maybe 3-4%, maybe more if there is QE3.
Apple is not the economy, even the developed world economy. About 315 million units have iOS (iPad, iPhone, iPod touch). Many families have multiple units so the total number of people who are driving the Apple story right now is not as big as it seems.
The only people I know who have these products tend to be in upper income groups (likewise people who read finance blogs).
There is a disconnect between the wealthy and the not so wealthy that is far greater than historical patterns – this is a reason for fragility of earnings overall, instability and uncertainty – the very things equity markets hate the most.
Long term the probabilities are toward the risk markets selling off. It is a natural function of the level of de-leveraging that needs to take place in the developed world.
And if the above doesn’t prove my point maybe this will.
Just Apple’s cash balance of over 97 billion is greater than the market cap of 448 of the 500 S&P500 companies. It is not a leading indicator.
As a victim of a buy and hold financial planner, I have started to invest on my own. But what is a newbie supposed to do with articles and blogs like this that predict a big drop is coming? I don’t want to rely on some newsletter or blog that may or may not be around in 5-10 years. I’d like to come to the same conclusions myself (at least more often than not). Suggestions?
Johnny here is some solid advice….take all advice with a healthy dose of skepticism…..consider the source…..develop your very own strategy….risk only what you are comfortable losing all or part of …..wait for the “fat pitch”….
“Danielle Park says:
January 25, 2012 at 8:14 pm
Three words: timing is everything. We should never look to the product sellers to tell us our timing is all. Barring perfect blind luck, we always need a method of our own to determine when to buy and when to sell funds in any sector or company.”
Johnny: My advice is to learn not to predict but observe what the auction marketplace is doing ‘at the time’. Is it acting right? No one can predict, thats just nuts.
I learned from William Oneil himself, founder of Investors Business Daily. He wrote How to Make Money in Stocks, a classic. He is one of the best investors of all time. If you get the book, get the blue and orange covered one. It has the 100 charts in the beginning with annotations. You will soon learn about how to read charts, not predicting. He did make a bloody fortune in Amgen AMGN in the 90’s and he is making another bloody fortune in Apple AAPL. And he never risks capital ‘predicting’…ever. He finds winners with earning very early, pyramids and sits….sits on his position until the CHARTS tell him it is time to go.
FWIW. Hope it helps.