Wednesday, May 21, 2008

Market Update

It's quite likely that the wave that started in the March lows is complete and we are now in a down wave. One reason that this might not be the case is that there seems to be a lot of consensus around the blogosphere etc. about that. Bears have been hoping for a new bear market leg down and are now acclaiming its arrival. Bearish sentiment seems to have risen again recently from my perusings. Seems too easy. So the downswing might not be that strong if there is a significant one at all. A good historical analogy is shown in the charts above. The best comparison would be with the early December 2002 peak which marked the end of wave 1 of the bull market. Wave 2 lasted into March 2003 and saw most of the advance retraced. However, the rally so far has been only around 14% or so while the rally from October to December 2002 was around 22%. Global stock valuations are better now, but the US economy is probably weaker as by late 2002 the US recession was clearly over. Other possibilities is that the current juncture is more like June 2003 (the pattern in the stochastics certainly looks like that), where there was a very mild pullback or August 2002 when the market made a marginally lower low in the pullback that ended in October. None of these is an armageddon scenario...

Most non-US markets such as Britain, Australia, Germany, and Japan made their bear market lows in March 2003. Most of those charts currently look much more bullish than they did in December 2002. Much more like the way they looked in June 2003.

The only defensive action I've taken so far is to sell $8000 worth of the CFS Geared Share Fund yesterday and about $2000 worth of the CREF Equity Index Fund a couple of days ago. I went to cash in my Australian non-retirement account and switched to CFS Conservative Fund in my superannuation account. I switched into CREF Bond Fund and TIAA Real Estate Fund in my 403b. This is just rebalancing after the rally we have seen. I guess I'm betting on the June 2003 scenario, especially for Australia. When I switched heavily to equities in March and early April, I assumed that the worst case scenario was that it was actually December 2002 in Australia or July 2002 in the US. So I'm prepared to take some set back without panicking. But there is no way to actually know what will happen.

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