Sharechat Logo

Stockmarket bottom-feeders keep opportunistic eye out for recovery

By Neville Bennett

Friday 2nd August 2002

Text too small?
Panic in world stockmarkets has been interspersed with strong rallies. Investors under stress drive markets. Their emotions are extreme in volatile markets.

One day they mutter "capitulation," the next they perceive "value" and go bargain-hunting. Last week has seen five-year lows and 15-year record gains in one day. The yo-yo is classic bear market behaviour.

The art is in picking the bottom. Buying cheaply can be hugely rewarding. The rewards motivate risk-takers to back the rallies. Much bullish sentiment has survived the 28-month decline in the indexes. Some expect an early recovery. They are unlikely to be right.

The fault lies in the assumption that panics create vee patterns of crash and quick recovery. To be sure, that happened after September 11 but few people doubted the market then. The problem was terror.

A quick recovery did not take place after New Zealand crashed in 1987 and Japan in 1989. Japan has lost three-quarters of its value. Wall Street may not bounce back.

Bears stress the nature of the investment cycle. Markets increase in a bull run to a top and then decline into an intensifying bear market. The bottom is deep and protracted and the majority of stockholders sell out.

When stocks are dirt cheap bottom-fishing starts again, confidence tentatively recovers, stock ownership broadens again, stocks increase more rapidly in price, euphoria takes over, the public become engaged and stocks are over-bid.

This classic scenario requires extreme selloffs, which have not yet occurred. A good measure is the number of days when 90% of stocks fall in value.

Another indicator of a bottom is when stocks offer good value in price/earnings terms. The S&P500 is at about 900 and yielding a p/e of 30:1. Bears expect it to fall to 500 where it will yield a p/e of 15:1. The fair value argument sees the bottom a long way away.

Share values have been inflated by a lot of hype, which has drawn in an ever-widening group of citizens. Many will now feel disillusioned by the 40% fall in shares this year and rue reading market analysts who have overdone their recommendations.

More revelations of malpractice are expected and it seems likely the market will be down further by September and October, which was the bottom period in some recent bad years like 1982, 1986, 1987, 1990, 1994 and 1998.

Chartists also feel the bottom is remote. Most indices are in a classic "head and shoulders" pattern, which seems to portray great downside potential.

Only now are some indications of financial stress appearing. But it is usually supposed that crashes on the Enron and WorldCom scale must have wounded deeply some financial institutions. Where are the casualties? When will there be an upsurge in margin-call selling or in index fund redemptions?

The technology, media and telecommunications sector has fallen 70% from its peak. AOL is typical of the group but it still does not look cheap as earnings are down and debt levels seem excessive. Financial stocks are beset by vigorous rumour.

The bottom may not be at a defined level. US equity prices and consumer confidence are correlated. The panic has shown up already in lower consumer expectations, according to the University of Michigan.

The risk is that contracting wealth will trigger reduced spending, as it has in deflationary Hong Kong and Japan.

This analysis also contradicts the current wisdom that declining stockmarkets are out of step with a vibrant economy. A more appropriate argument is that the market is a sensitive leading indicator of the economy's direction. The market is pointing toward a recession.

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comment:
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

SML - Synlait Milk Limited - Trading Halt of Securities
AIA - Auckland Airport announces board chair changes
AIA - Auckland Airport announces board chair changes
CEN - Tauhara commissioning progress update
FPH initiates voluntary limited recall
March 28th Morning Report
KFL Celebrates 20 Years of Excellence in Investment Mgmt.
SVR - Savor FY24 Earnings Guidance & Change in Banking Partner
NZK - NZ King Salmon Investments Limited FY24 Results
March 27th Morning Report