SPY

[Stocky2000]

sure the S+P i also like more to watch at....more firms in the index.

it looks like the rallies get weaker look at the last 3 circles on the macd hist....this is one of the best indicators....bulls get weaker.....at the close of 1416 doesnt look bullish more like freefall....and big resistence at 1440 and 1489.....

[stocky]

With so much bearishness and so much chart reading, its seems to me that all the drum beating by press and the wall st is being done to force Fed to lower the interest rates.

[Stocky2000]

With so much bearishness and so much chart reading, its seems to me that all the drum beating by press and the wall st is being done to force Fed to lower the interest rates.

the latest rate cut in october didnt help much...longs that bought on that day are deeply in red now...

[David Randolph]

1. Introduction

I've spent the Thanksgiving holiday with my family but unfortunately my mind was elsewhere, thinking about the current state of the stock market and potential future developments. All my adult life I've been a "macro-economist" until about eight months ago, when I've decided to embrace stock picking and investing for the long term from a business perspective, because I believe this is the most logical and productive way to build and grow one's wealth in a 30 to 40 years time span. I will never own a tenbagger (in Peter Lynch's terminology, a stock with a 1,000% return over the years) if I keep getting in and out of the market as I feel bullish or bearish.

But for this article I want to put back my economist's skin, because I believe everybody wants to read opinions on where this market is going and I think I got a valid idea.

2. The 1990-91 Recession and Now

I have a central thesis for my long term bullishness, but I wanted to find some evidence in history that things could and will probably unfold the way I predict. In my studies I found important similarities between the 1990-91 Recession and the period we're living. I've read several articles explaining what caused the early 90's recession and the mood of the moment.

The following excerpt of the "Economic Review - Federal Reserve Bank of San Francisco, 1993» gives us a nice summary of what happened in 1990-91:



Does "pessimistic consumers", "debt accumulations", "jump in oil prices" and "credit crunch" ring a bell? It sure does, this is what we have now.

But back then, as I believe it is the case now, a much bigger and more relevant economic trend was going on in the backstage, and that's why the 1990-91 Recession had the following effect on the S&P 500:

3. Stock Market Reaction



The 1990-91 sure was a painful period for stock market investors and many if not most bailed out and said: "Stock market? Never again". Yet, it took just seven months for the S&P 500 to march to new all time highs and you see what happened from then on, the market jumped four fold between 1991 and 2000.

I believe this happened because the central theme of the bull market, which was a productivity spurt given by technological advances (with the personal computer taking center stage) was far more important for the US and the World economy than a simple cyclical recession.

At the present moment we also have a long wave of growth and bull market theme which is far more important than a cyclical economic fluctuation, so my best guess says the long term reaction of the stock market will be similar.

4. The Current Long Term Bull Market Central Theme

The current long term bull market central theme is Globalization and the emergence of new economic powerhouses in the World.

A few years ago there were only three relevant economic regions in the World, where just 13% of the population lives: North America, Europe and Japan. Now and just mentioning the biggest, we have China, India, Brazil and Russia emerging as economic powerhouses. In these four countries lives roughly half of the World's population. If, over the long term they get nearly as developed as North America, Europe and Japan, what you have is 3 billion more people with purchasing power in the World, which is an immense new market for companies to sell their goods and services. And there are no barriers ... if you have a superior technology you'll sell it around the World, not just in the US. If you have a successful business model you'll implement it around the World, not just the US. Forget the countries, it's just one World now. It is connected like it has never been, and this means ideas and innovation will spread faster than ever before.

A quadrupling of consumers will lead to a quadrupling of sales and a quadrupling of profits, in general. And this has to mean a quadrupling of the stock market, so I predict the S&P 500 will be around 6,000 points, say, in 2018. 

5. The Stock Picker's job

Being a stock picker is a tough job, because one has to think long term and yet deal with all the short term developments. He has to pick a business, not a stock, that he believes will grow quite a lot over the next several years and then see if the price to pay for that expected growth is attractive or not. The stock picker's most important difficulty, in my view, is the non-linearity between the present and the future and the time it takes to get evidence that one is right. Stock prices don't say "you're right" everyday, they'll always keep you in doubt ... at the starting point and then in every step it takes to build a multiple bagger.

But just one tenbagger compensates for 10 complete disasters, you think about it (not that I think I own 10 complete disasters, of course I believe none is). This is why diversification is so important.

6. Conclusion

With this background in mind I'll just keep holding all the stocks currently in the Main Portfolio and will look to add three more over the next couple of weeks.

I hope you had a nice Thanksgiving and wish you a good weekend

[kslifka]

1. Introduction

I've spent the Thanksgiving holiday with my family but unfortunately my mind was elsewhere, thinking about the current state of the stock market and potential future developments. All my adult life I've been a "macro-economist" until about eight months ago, when I've decided to embrace stock picking and investing for the long term from a business perspective, because I believe this is the most logical and productive way to build and grow one's wealth in a 30 to 40 years time span. I will never own a tenbagger (in Peter Lynch's terminology, a stock with a 1,000% return over the years) if I keep getting in and out of the market as I feel bullish or bearish.

But for this article I want to put back my economist's skin, because I believe everybody wants to read opinions on where this market is going and I think I got a valid idea.

2. The 1990-91 Recession and Now

I have a central thesis for my long term bullishness, but I wanted to find some evidence in history that things could and will probably unfold the way I predict. In my studies I found important similarities between the 1990-91 Recession and the period we're living. I've read several articles explaining what caused the early 90's recession and the mood of the moment.

The following excerpt of the "Economic Review - Federal Reserve Bank of San Francisco, 1993» gives us a nice summary of what happened in 1990-91:



Does "pessimistic consumers", "debt accumulations", "jump in oil prices" and "credit crunch" ring a bell? It sure does, this is what we have now.

But back then, as I believe it is the case now, a much bigger and more relevant economic trend was going on in the backstage, and that's why the 1990-91 Recession had the following effect on the S&P 500:

3. Stock Market Reaction



The 1990-91 sure was a painful period for stock market investors and many if not most bailed out and said: "Stock market? Never again". Yet, it took just seven months for the S&P 500 to march to new all time highs and you see what happened from then on, the market jumped four fold between 1991 and 2000.

I believe this happened because the central theme of the bull market, which was a productivity spurt given by technological advances (with the personal computer taking center stage) was far more important for the US and the World economy than a simple cyclical recession.

At the present moment we also have a long wave of growth and bull market theme which is far more important than a cyclical economic fluctuation, so my best guess says the long term reaction of the stock market will be similar.

4. The Current Long Term Bull Market Central Theme

The current long term bull market central theme is Globalization and the emergence of new economic powerhouses in the World.

A few years ago there were only three relevant economic regions in the World, where just 13% of the population lives: North America, Europe and Japan. Now and just mentioning the biggest, we have China, India, Brazil and Russia emerging as economic powerhouses. In these four countries lives roughly half of the World's population. If, over the long term they get nearly as developed as North America, Europe and Japan, what you have is 3 billion more people with purchasing power in the World, which is an immense new market for companies to sell their goods and services. And there are no barriers ... if you have a superior technology you'll sell it around the World, not just in the US. If you have a successful business model you'll implement it around the World, not just the US. Forget the countries, it's just one World now. It is connected like it has never been, and this means ideas and innovation will spread faster than ever before.

A quadrupling of consumers will lead to a quadrupling of sales and a quadrupling of profits, in general. And this has to mean a quadrupling of the stock market, so I predict the S&P 500 will be around 6,000 points, say, in 2018. 

5. The Stock Picker's job

Being a stock picker is a tough job, because one has to think long term and yet deal with all the short term developments. He has to pick a business, not a stock, that he believes will grow quite a lot over the next several years and then see if the price to pay for that expected growth is attractive or not. The stock picker's most important difficulty, in my view, is the non-linearity between the present and the future and the time it takes to get evidence that one is right. Stock prices don't say "you're right" everyday, they'll always keep you in doubt ... at the starting point and then in every step it takes to build a multiple bagger.

But just one tenbagger compensates for 10 complete disasters, you think about it (not that I think I own 10 complete disasters, of course I believe none is). This is why diversification is so important.

6. Conclusion

With this background in mind I'll just keep holding all the stocks currently in the Main Portfolio and will look to add three more over the next couple of weeks.

I hope you had a nice Thanksgiving and wish you a good weekend

Nice Analysis David.

One thing we don't have Yet...is high U.S. unemployment.  I remember the early 1990s well...since I was graduating college back then.  Many were having trouble finding a job coming out of school.  I luckily had a job lined up.

I noticed the U.S. unemployment rate jumped from a low of 5.2% in early 1990 to a high of 7.8% in the summer of 1992. 

The U.S. unemployment as of October 2007 was only 4.7%.  We'll have to keep watch to see if this starts to rise.

[chinaguru]

David: Great post! I'm fully invested in US, China, Hong Kong and Japan right now and no fear. Your analysis encourages me.

[stocky]

David, great post.

[Stocky2000]

Strong Risk of a crash

The S&P 500 is headed for a test of primary support at 1400. Failure would signal the start of a primary down-trend. Twiggs Money Flow displays a large bearish divergence, warning of a reversal. Recovery above 1500 is not expected, and would indicate that the threat is over. I am positioning for shorts. Great we are buildung a bit of right shoulder.....Looks like a double top....and we reached the level of 2000.

[stocky]

David,

With .OB and very micro stocks like UTVG.OB, CHME.OB, CIMT amd PFSW out of consideration due to HIGH RISK FACTOR, many subscribers like me would like to see the main with atleast 20 holdings, so that if 5 of them are HIGH RISK we can have atleast 15 of them which we would like to buy and hold in our portfolios.

Also the 3SoF policy of "high return with low risk" seems to have lost focus due to these .OB and ultra micro plays being part of the main. Hope the focus could be achieved again.

[stocky]

Also giving some perspective about David call for BRIC countries and new consumers, I think the phenomena is even bigger. The race to prosperity is not just restricted to Brazil, Russia, India and China, infact it is much more broad based. Let me give you an example. Even with all kind of troubles in Pakistan, the growth in telecom sector has been more than 10 fold in last 8 years and its still very strong. The same is true for Sri Lanka, Bangladesh, Nepal, Vietnam and other smaller countries whose name you may have never even heard. And these are not oil rich middle east which are booming on oil but these are just poor countries now seeing some global prosperity.

The US may have housing and credit problems which may rush to recession but the world as a whole is going to see some exciting growth and the population demand for services and goods are going to be there. The stock picker job to focus on businesses should be actually focus on 'Global Businesses'. Short term things could be nasty but you wont like to miss the big run of SPY to 6000 as David predicted. 

Mean while, it would be great if David can analyze each main holding with the percentage of revenue from the global consumer.

[stocky]

In my own opinion, of the all main holdings only ASTI, TBSI, IMMR, GIGM and JAKK fit the global consumer phenomena. While SDTH could be a legitimate China growth play.

[la-onda]

the bearish look:

[bourbonstreet_crawdaddy]

But what if we put in a triple bottom at 1376 or so?

Wouldn't that be a stronger setup for a rally than if any double bottom took place?

March 14 at 1364 and August 16 at 1370 would be the first two bottoms in a triple bottom, and the next bottom would most likely be the 3rd bottom, from which a very powerful rally might ensue?

Thanks for your input

Bourbon 

[Stocky2000]

The MACD Hist goes red the first time since the bullmarket started(yellow circle).......monthly...sure the month is not finished yet...but closed weak today.

[kslifka]

Is SPY going to rebound from here. 

Notice it closed right around the steeper trend line going back to July '06 and also closed just about at the August 15th close of 1406.7.