The technical analyst Robin Griffiths, now working for the blue chip firm of Cazenove, was in more than usually ebullient form at an Investment Research of Cambridge seminar in London last week. With the precision that never ceases to amaze me about technical analysts, he laid out the dates when he expects the next turning points in the market to occur.
As someone who lacks any belief in the mumbo-jumbo theories that typically accompany most chartists’ projections, I nevertheless find the insights of the best technical analysts helpful in forming broad market views (by best I mean those who understand how markets behave in real life and allow their charts to inform, rather than dictate, their views).
The scenario which Robin outlined is certainly a plausible one that makes a lot of intuitive sense in a period when markets continue to yo-yo between fears of inflation and deflation. His starting point is the unarguable one that the big indebted countries, such as the US and UK, are on a different route map to those of the fastest growing developing economies. While the former are still toiling their way through a secular bear market, the latter are in a clear secular uptrend.
In practical terms what he thinks this means is that the US stock market will head down again from its current technical rally, with the S&P index falling from 1100 now to around 940 by late October, which is when he reckons President Obama will introduce a new set of stimulus measures, including a second round of Quantitative Easing. That will give the market one more short term boost before capitulation finally sets in and the market falls back to test its March 2009 lows some time towards the end of 2011, with both yields and p/es down to around seven, a typical end of bear market level.
Although that will probably mark the end of the secular bear market that began in 2000, it will still take some years, in Robin’s views, before the US embarks on its next sustained bull run. That is not likely to be in full swing until the next cohort of young in the American population reaches the economically influential age of 30-35 some time in the period 2015-2020.
For the best developing countries, such as Brazil and India, he argues, the short term pattern will be similar, but more volatile. The key difference however is that these two markets, unlike the US and UK, remain in a secular bull market and so the medium term picture, helped by a vastly superior demographic profile, will be much brighter.
Robin sees the Sensex index in India (his favourite long term market) first testing resistance levels at 15,000 or 16,000 this autumn before revisiting the former peak at 21,000 next spring and falling back to its current level when Wall Street bottoms towards the end of 2011. After that however, it will be onwards and upwards, with the Sensex index powering on to a succession of new highs while the indebted developed world still stagnates in relative terms.
China and Russia, in contrast, are on quite different trajectories, which makes lumping them in together with the other BRICs less sensible. Robin’s view is that the Chinese market, which is already down 70% from its peak, has further to fall in the short term, but will then move on the higher ground once the current tightening has run its course. Russia has a terrible demographic profile – life expectancy is falling rather than rising, he believes - and is a market that most investors will want to avoid.
My View: I don’t know if the equity markets will retest their 2009 lows, let alone when, but a big setback is certainly still a possibility at some point in the next 18 months, as the ebb and flow of inflation/deflation news will continue to drive short term trading patterns in the market for some time. The consequent volatility will muddy the waters for many market participants.
My best guess for now is still that the markets will move higher towards the end of this year. While large cap equities and the best emerging markets both look extremely attractively priced for the long term, the risk of a severe correction next year will deter the faint-hearted who cannot face the possibility of another testing down year like 2008.
UK and US Government bonds face the reverse of this outlook: periodic potential gains in the short term, driven by risk aversion and reaction to news flow, offset by the prospect of long term penury for those who buy and hold – rather than trade - them at their current historically low yield levels.
