Bears seized the moment to make their biggest move for the year
A current mayhem in the Banking and Financial sector triggered by President Obama’s proposal to limit proprietary trading activities of banks, a Credit Tightening in China which is a move viewed to stunt growth of this Economic giant, a DOW Index that is in severe negative momentum, having fallen a total of 300+ in 2 consecutive days and a weekend ahead, all combined, provided the lethal edge to the Bears to sow fear and panic and sent the DOW in irreversible sell off momentum in the final hours of today’s trading session.
Another big 217 points is shaved off from the DOW today and the DOW had slid more than 500 points in three consecutive days.
The common question now I guess is, where is the DOW headed to? Are we seeing the DOW breaching the 10,000 mark and decimate all it gains made from 2008 financial crisis time?
To answer this, let us study the cause/s of this ongoing big fall.
Foremost is, the “proposal” of President Obama is not that evil as many may see it. The positive side of his proposal is to prevent Banks and Financials, too big to fall, going bankrupt and thus, avoid a repeat of global financial meltdown. It is a preventive measure. The negative side is, it makes Banks and Financial Institutions churn out lower Revenues thus, lower income and growth.
Now which one is lesser evil? Which one redounds well for the good of everyone?
Next is the tightening of Credit in China. This is causing a lot of concerns that demands in commodities, oil and metals by this industrial behemoth will slow down and thus, slow down businesses with its trading partners around the world as well.
Again, let’s see which one is lesser evil. The Chief Bank Regulator of China advised banks to tighten credit a bit on the account that an unprecedented $1.7 trillion had been loaned out already last year. He is, too, concerned of a potential bubble in an Credit Market that would have catastrophic global impact if it bursts. The flipside of course is, lower growth for China and its trading partners.
So which one should we choose, Revenues and Growth for a certain sectors/country or a Global Financial Stability going forward?
Anytime, it should be Global Financial Stability. Throw out this banking reforms of the Obama administration as a challenge to Banks and Financials to innovative or reinvent themselves to attain those rosy revenues and growth without the expense of global financial stability.
So now we can go to the question, where is DOW headed to?
My answer is, definitely the DOW is not headed to 9000 level and we will stay above the 10,000 level in the days to come. The total 500+ points fall was anoverdone knee-jerk reaction to a positive change and much of these are Bear-induced falls.
In the long term, China’s Credit Tightening and Presidents Obama’s proposal will be digested and adjusted to should the bill get passed in the US Congress.
In the meantime, for every change, it will take a slow process of “getting used too”. Hence, we will see a possible “roller coaster” move by the DOW and perhaps China’s Index in the days to come. But that will pass and overall, 1 month down the road, we may see a vibrant DOW and China Index.
Prepare then to buy the lows come Monday and aim to sell in a rebound/rally. Should you not be able to do this, but rather find your holdings experiencing increase inpaper losses, just roll with the volatility beacuse there is no fundamental problem.
The 5-year Bull run may start in 2010
It maybe very untimely to espouse this kind of opinion at the very moment when the prevailing sentient is fear and panic in the market and the DOW is reeling in big losses.
I would like to dish off a call at this time of uncertainty where I create value added rather than making one when there is a clear trend for that would be tantamount to a no- brainer call.
Looking for a similar pattern
The Sub-prime bubble burst in late 2007. Its full blown effect was felt in whole year of 2008 up to the first quarter of year 2009 as it exploded into a global financial crisis. The sudden death of Lehman Brothers, a financial giant, among others, forced US government to intervene and loan so many billions of Dollars to rescue remaining Banks, Financial institutions and even Auto Companies too big too fall.
The DOW slid continuously from the high of 14,000 in 2007 to below 7,000 level in the first quarter of 2009. Traders had to travel back in time to the year of 1928, to compare the magnitude of the Stock Market Crash in 2008 to that of the 1928’s Great Depression.
But just as the saying goes, everything shall pass and here we are now, off and had recovered from the Market Crash in 2008 and on to head for a 5 year bull run.
Let’s take history as our guide and we’ll go back as far back as 1928 to see how Market Crashes developed nto Bull runs.
Click the Chart to Magnify
In the Chart above, we can see the previous Crash of the DOW in 2002, caused by the Dot.com Bubble as well as the recent 2008 Market Crash. Can you spot a possible “double bootm” pattern?
Let us truncate the chart and blew it up to better appreciate the details.
Click the Chart to Magnify
From the chart above, the 2002 Market Crash recovered in 2003 but not after a correction happening in the early part of 2003 and then headed to a continuous 5 year Bull run up to 2008 (see the arrow)
Aside from the “double bottom” formation that we see which may indicate a potential bounce, we see an unfolding pattern to be the same or thereabouts, for 2009/2010 with that of 2002/2003. The Crash in 2008 recovered in 2009 and 2010 is now very pivotal year for a possible 5-year Bull run or thereabouts.
Right now, DOW in 2010 is correcting similar to the early goings of that of 2003 before heading to a long Bull run. Should 2010 be able to shake off these “current noises” which are intentoinally induced, then, 2010 could be the harbinger year of a long prosperous Bull run taking history as a basis.
Current fundamentals support a recovery and a possible Bull run.
Today, Mc Donald and GE report their earnings that beat Wallstreet’s estimate. Unfortunately, the current jitters on President Obama’s proposal simply overshadowed these good earnings that are trickling in. Other blue Chips like Apple, Microsoft, Caterpillar, 3M are upbeat wit their earnings disclosures that could come one by one in the days to come. Even the banks and financials that would be hit hard by the “proposal” posted better than expected earnings,like American Express, JP Morgan among others.
In short, the climate had changed from crisis in 2008 to today’s earnings.
Jobless rate also had steadied below the 10% level. The FED rate continues to support recovery as it stayed at 0.25%.
All these combined, makes up and indicates a robust fundamental going forward.
Analysis of TP GURU Andrei…
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Posted by Jun Bumanlag 
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