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Cazenove strategist Robin Griffiths says the charts point to a buying opportunity in Asia later this year, while western markets could recover around 50% of their losses over the next month.
He writes:
Most world stock markets have suffered a bad fall. This move does not look like the end of something, but more like the start of a new bear market for the Western world.
However, there will still be opportunities to make money in these markets. To put that into perspective, we note that all Western markets are lower now than they were ten years ago. They are in a secular bear move. Around this secular trend there have been successive cyclical bull and bear phases. The last of the bulls started in March 2009 and has now just ended.
In a normal four-year cycle, markets tend to have three good years and one bad. However, in the presence of a secular downtrend, the skew tends to become nearer to 24 months up and 24 down. The most recent high was 26 months after the March 2009 low. The system is working pretty much as it should.
Investors are realising that their earlier hopes of a strong, self-sustaining, recovery in the West were too enthusiastic. They are now concerned that a long period of very modest growth at best, or a new recession at worst, is a more likely outcome. Such is the level of fear attached to this change of view that the price of gold has reached new highs.
We have used the analogy of a railway train, with the engines of the world at the front. These are China and India, whilst the carriages at the back are the mature Western markets. The length of the train is about one year long. It is indeed true that the Asian and emerging markets have been in a cyclical bear phase for well over a year and are now into the final capitulation leg.
This is likely to represent a good buying opportunity very late this year. The Western markets may not hit bottom until late next year with the laggards not bottoming until four years after the last major low, which targets March 2013.
This is what the charts are telling us to expect in more detail:
Stay connected: Robin Griffiths: west may recover 50% of losses in next month
by Robin Griffiths on Sep 12, 2011 at 10:08
Cazenove strategist Robin Griffiths says the charts point to a buying opportunity in Asia later this year, while western markets could recover around 50% of their losses over the next month.He writes:
Most world stock markets have suffered a bad fall. This move does not look like the end of something, but more like the start of a new bear market for the Western world.
However, there will still be opportunities to make money in these markets. To put that into perspective, we note that all Western markets are lower now than they were ten years ago. They are in a secular bear move. Around this secular trend there have been successive cyclical bull and bear phases. The last of the bulls started in March 2009 and has now just ended.
In a normal four-year cycle, markets tend to have three good years and one bad. However, in the presence of a secular downtrend, the skew tends to become nearer to 24 months up and 24 down. The most recent high was 26 months after the March 2009 low. The system is working pretty much as it should.
Investors are realising that their earlier hopes of a strong, self-sustaining, recovery in the West were too enthusiastic. They are now concerned that a long period of very modest growth at best, or a new recession at worst, is a more likely outcome. Such is the level of fear attached to this change of view that the price of gold has reached new highs.
We have used the analogy of a railway train, with the engines of the world at the front. These are China and India, whilst the carriages at the back are the mature Western markets. The length of the train is about one year long. It is indeed true that the Asian and emerging markets have been in a cyclical bear phase for well over a year and are now into the final capitulation leg.
This is likely to represent a good buying opportunity very late this year. The Western markets may not hit bottom until late next year with the laggards not bottoming until four years after the last major low, which targets March 2013.
This is what the charts are telling us to expect in more detail:
- Immediately we could see a rally that could last about a month and will take Western indices about 50% of the way back up from where they have just fallen. This could be triggered by action such as QE3 from central bankers. This rally should not go above the now falling 200-day moving averages. The US S&P index could reach circa 1260 and the FTSE, 5600.
- We could then see a further decline into the normally weakest part of the year, late October. This will be a new low for the year and could set up a further tradeable buying opportunity for Western markets with the FTSE at 4400 and the US S&P at 900.
- The charts then point to a rally from a late-October low into early next year which would top out in March, at the latest, and will not go back to new highs. The markets could then retrace some of the gains until we reach a true buying level for Western markets between October 2012 and March 2013.
- As for the Asian markets, the charts point to a truly good buying opportunity later this year, probably from late October onwards. This will be a good strategic moment to invest further in the East’s long-term growth story at attractive valuations. We will then watch as China and then India go on to become the largest stock markets in the world. These markets remain particularly volatile so the timing of such a strategic shift is important.
- We expect that gold, having just shot up, will see some profit-taking. It may fall back now to US$1650. By late September however, we expect the fall to be over and this could set up the next buying opportunity. The charts are telling us that we can expect the price of gold to go well above its current level in the future.
- Meanwhile, with the dollar remaining the world’s reserve currency for now, we expect it to strengthen once the next brief rally fades. Investors may continue to buy US Treasuries in a flight to safety but at current valuations, it is very difficult to justify owning them.
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