Riding out the market mayhem

There’s growing unease among analysts that the 5-year bull market may finally be dead

ALEX ROSLIN
SPECIAL TO THE GAZETTE
Monday, January 21, 2008
The Montreal Gazette

[NOTE: The chart on the right accompanied this story. Click to enlarge.]

Six months of market chaos stoked by the U.S. real-estate disaster have left many investors and analysts exhausted, wondering which way is up.

While safe-haven gold and government bonds have roared to record or multi-year highs, most major global stock markets have punched through their lows of last November.

Last week, they hovered around the sad-sack levels set back during the credit crunch of last August.

The S&P/Toronto Stock Exchange composite index seesawed below and above the 13,000 level in wild trading last Wednesday and Thursday, down 11 percent since its peak in October.

The Standard & Poor’s 500 index was off 13 percent, while the more volatile U.S. Semiconductor Index has lost 30 percent.

Even the once mighty banks are getting crushed. The benchmark KBW U.S. Bank Index is down over 25 percent since last September.

More importantly from the viewpoint of chart watchers, banks never saw any of the recovery that the broader markets enjoyed last autumn, instead flinging themselves down lower and lower while gruesome revelations emerged about the extent of the subprime fiasco.

Canadian banks are on somewhat more solid ground, but they, too, have fallen a head-turning 14 percent—more than the average stock in Toronto—since October.

So far, most of the major indices have yet to bust down below the major uptrend lines they have formed since 2004. The correction has seen the TSX and S&P 500 drop down to touch those key lines, but so far they haven’t been violated.

As well, by the usual definition of a bear market—a 20-percent drop from the peak in prices—most major indices are still officially in a bull.

But some sectors haven’t fared so well—a warning sign, say analysts, for the broader markets.

Last fall, the Russell 2000 index of U.S. small companies and Japan’s Nikkei Stock Average both crashed well below their respective uptrend lines. And the KBW bank index ended its uptrend last summer.

It’s all got a growing school of uneasy analysts brooding that the five-year-old bull market may finally be dead.

“I can’t recall ever a year starting this bad,” says Stephen Vita, a professional trader in Bradford Woods, Pennsylvania.

The exploding market volatility reminds him a lot, he says, of the turbulence he saw when the last bull market topped in 2000, as the dot-com bubble started to unwind.

In some ways, the current turmoil is even worse, he says, and that’s caused him grief when trying to make market predictions.

Vita went into last Wednesday thinking, like many traders, the market was poised to break down forcefully. Monday and Tuesday had seen a rally attempt fail and turn into a sharp drop for equities.

At 9:32 a.m. Wednesday morning, two minutes after the opening bell, Vita put 50 percent of his managed funds into action selling short the S&P 500 index. (Selling a security short is a way to profit when it declines.)

Initially, it was a good call. The S&P 500 fell. But an hour later, the index started to shoot back up and, eventually, it clawed its way into the black.

At 1:50 p.m., having lost most of his early gain, he wrote on his website, AlchemyOfTrading.com: “Momentum trading is a great game for as long as it lasts, and if you don’t know when that point arrives they will carry you out.

“Actually that isn’t really true. They won’t take the trouble to carry you anywhere and will just bury you under the trading room floor.”

By 2:31 p.m., the index rallied even higher, this time putting his position solidly in the red. He closed his position with a 0.30-per-cent loss for his total portfolio.

Just minutes later, however, the rally fizzled and the index tumbled down to close back in the red.

“What a sick beast this is,” Vita wrote on his site.

In an interview later he said, “It was a day very much like 2000 when you get yanked around. Actually, it’s funkier than it was back then. There were more rallies (then) you could play with more confidence than this.”

While Vita said he’s not big on trying to forecast market direction, he says most signs suggest the market has, indeed, entered a bear.

That means any rallies in coming weeks or months will likely stop before reaching new highs, followed by declines that send prices lower, perhaps much lower. The key level to watch, he says, is last August’s lows.

“If they take out the August lows, then you’ve got to figure it may not go down just 10 percent. It could go down 20 or 30 percent.”

John Roque, head of technical analysis at New York investment bank Natixis Bleichroeder, agreed it’s more likely markets will make new lows before making any new highs.

While Roque, like Vita, was reluctant to issue longer-term predictions or label himself bullish or bearish, he said the most likely scenario is a short-term bounce upward into March because stocks have gotten so oversold, but he doubts any rally will forge new highs.

Key to watch on that rally, he said, will be what happens to the hitherto market leaders, like commodities. If they maintain vigor, he said, “the fears of a recessionary threat may not be as serious as we thought.”

More suspect, he said, would be to see currently downtrodden stocks like financials suddenly assume market leadership. That, he said, may mean a new market dynamic has emerged in which any rally is likely to be “more ephemeral” and short-lived.