While global equities recorded their best start in 18 years amid a recovering U.S. economy, Aaron Lynch, Chief Strategist for Safety in the Market, HUBB Financial Group’s stock market education unit, isn’t ready to celebrate.
Says Lynch “I and Safety in the Market have been trading a long time with the prevailing trends, we have concerns that the trend is not indefinite and that February will be an interesting month to watch.”
“We may get one more price shock to the downside,” said Lynch, whose trading career started as early as 1999. “February can be an interesting time in the market statistically and cyclically. Some of our longer term cycle projections suggest that we might see February produce an environment for volatility and changes in trends.”
The S&P ASX 200, the Australian share benchmark, gained about 5 per cent in January, underperforming the MSCI All-country index, which rose 5.8 per cent. It was the global index’s best performance since it climbed 6.5 per cent in January 1994, Bloomberg wrote on Feb. 2. The increase prompted global strategists, including Larry Hatheway, UBS AG’s chief economist, to abandon their bearish outlooks, according to Bloomberg.
“I am of the view that last year’s lows didn’t represent enough pessimism,” said Lynch, who prefers to take a more neutral to bearish outlook on the share market. “There wasn’t that level of extreme pessimism which you would like to see with big market lows.”
Shares Rise Before Falling
The Australian share market has hovered between the 4,000 and 4,300 mark since the start of the year and last closed at 4,290.71*. “The market often gets bullish and it likes to retest where it has been,” said Lynch. “If it gets defeated, the sentiment changes very quickly and the market will tank again.”
In technical analysis, traders use historical data to form charts that forecast future price trends. Virtually all fund managers and institutional traders use charting software to help make trading decisions. In volatile markets technical analysts can influence markets as news flow tends to be more difficult to read and fundamental analysts adopt a more cautious stance and liquidity reduces.
As the market rises, investor confidence will prompt a buying spree, said Lynch, who also writes for Yahoo!7 Finance, Your Trading Edge and Stocks and Commodities. “Those people, whose job is to buy at the top; they will be the last people that will probably push this market high enough and then I am thinking the catalyst would be Europe.”
The European debt crisis has dragged on for more than a year. While the problem appeared contained following tough rules on borrowings agreed last month and an approval to increase the Eurozone rescue fund to one-trillion euros (A$1.2 trillion) from 440 billion in October 2011, concerns remain that Greece will still default on its debts.
The Greek economy shrank 5.5 per cent last year and is expected to shrink another 2.8 per cent this year. Public spending soared and public sector wages doubled in the past decade. It has more than 340 billion euros of debt, about 31,000 euros per person for a country of 11 million people. While money flowed out of government’s coffers, its income has been hit by widespread tax evasion. The Greek government has a debt repayment due on 20 March.
No Capital Growth in Next 18 Months
“I see no capital growth through shares in the next 18 months, and I don’t believe we will return to what I would term an investors market where you can buy and hold,” said Lynch.
“2003 was the start of the last decent one,” said Lynch. The Australian All Ordinaries climbed from about 2,800 points in 2003 to more than 6,500 points in 2007 before the October 2008 crash. “People think I am anti buy and hold. I am anti buy and hold in the wrong cycle.”
Lynch and many other analysts expect current market volatility to continue. Europe will remain a source of volatility, Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital Investors, said in the 25th January issue of Oliver’s Insights.
However, unlike Lynch, Oliver expects 2012 to be a better year for shares compared with 2011 in part because of an improved global economic outlook and reduced risks regarding Europe. “This is also supported by the fact that shares are starting the year on share market valuations well below year-ago levels,” he said in his newsletter.
U.S. Market to Fall to 8,000 Points?
While Lynch is neutral to bearish about the Australian market, Joseph Granville, an 88-year old technical analysis veteran in the U.S., holds a far more extreme view about the Dow Jones Industrial Average. He expects the index to fall to 8,000 points by the end of 2012. The DJIA is currently trading around 12,700 points.
“Volume precedes prices,” Granville, a technical analyst who has been publishing the Granville Market Letter from Kansas City, Missouri for about 50 years, said in an interview on “Street Smart” on Bloomberg Television. “You are seeing much lower volume. That tells you that prices are going to go much lower, much lower than most people think possible and very few people have projected.”
Granville correctly forecast the bear market of 1977-78 and the burst of the Internet bubble that began in 2000. In March 2008, Granville said the Dow would end the year near 9,000, more than 27 per cent below its level of 12,392.66 at the time. The index finished the year at 8,776.39.
His predictions proved less prescient during some of the previous bull markets. He failed to foresee the rally that started in 1982 and lasted for five years. He also called for losses in 1995 while the S&P 500 rose every year till 2000, according to Bloomberg.
As the share market takes a respite from Eurozone crisis and focuses on a stronger U.S. labour market and slower Chinese inflation, the global market is currently awash with reports and analysis that current gains in equities may be sustainable, and could lead to a rising trend and a better 2012 for investors. But Lynch prefers to stick to his cautious stance.
“The beautiful thing is if I am completely wrong I will just go long and buy the market,” said Lynch.
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*Denotes value at end of trading closure as at 08/02/2012