Assuming that the Dow doesn't do an unexpected turnaround, and rise above 11,000, then, I seem to be one of those very few people on earth that accurately predicted a Market Top on the Dow at between 10,500 to 11,000 level, since April 2009. I would like to say that I was lucky.
Having said that, I have been asked, "How Low will the Dow go?" in this impending downturn?
I can give you a quick and short answer, like 9,000, but I want my 5 mins of fame in return, to babble on about how great I am. Hahahahaha. I'm just kidding. Instead, I would like to share with you the story of two people, to put my answer in the right context.
Two men have been recorded in history, as having predicted the Great Crash of 1929, amongst the many millions who invested in the stock market then. But why do we even bother to know more about them?
Because it is in human nature that we like to see bad things happen to the heroes and heroines in a movie, but we don't want to personally experience bad things ourselves. There is a tendency to shoot the messenger of bad news when the predicted bad events really happen.
Of the two men who were prescient of the Great Crash of 1929, one ran down Wall Street wailing and babbling about a potential stock market crash, while the other said nothing to anyone about it. Roger Babcock told anyone and everyone who would listen to him, and even those who didn't want to listen, that the stock market would crash, less than a week before it did. Everyone who heard his prophecy thought he was a mad man, because this was a time when people thought that the stock market had reached a plateau where it could not fall lower.
Even after the crash had happened, people did not see Roger Babcock as a knowledgeable man, but instead, held inquiries as to whether he had any insider information to justify his ability to make such an accurate prediction. Possibly, in the 17th century, he might have been burned as a witch?
When the investigators found that he did not have any insider information, they concluded that he was merely a madman, who had "accidentally" predicted the stock market crash. No acknowledgment was made of his skill, neither was there any attempt to learn from him, so that one can be protected from future crashes.
This man, did not live to enjoy wealth and happiness, despite his attempt to protect as many investors as possible. I believe that Roger Babcock did not act on his words, and thus, he never profited from his analysis and market outlook. Almost 80 years later, I saw his book on the stock market being sold in the bookshop, not because there is a great demand for his book, but because it was an opportune time, to print a book written by one of the two infamous men, who had predicted the Great Crash of 1929.
Unlike Roger Babcock, who talked but didn't act, there was another, who acted and didn't talk. His name was Jesse Livermore, the legend of Wall Street. No trader worth his salt, has not heard of Jesse Liverrnore. In fact, no trader worth his salt, has not studied the methods of Jesse Livermore. Billionaire Trader, Paul Tudor Jones, has recommended "Reminiscences of a Stock Operator", written by Edwin Lefevre, as one of the key bibles on trading, that no trader can afford not to study. Reminiscences traces the thoughts and actions of Jesse Livermore, as a trader. Some have thought that Edwin Lefrevre is actually, Jesse Livermore himself, writing under a disguised name, whilst, most believe that Lefevre interviewed Livermore in writing the book. In any case, I have read this book 4 times over the past 15 years. It is a fantastic book.
When Jesse Livermore came home, on the evening of the stock market crash of 1929, his wife had packed and sent away the furniture in his big mansion, to a smaller home they own. He was bewildered as to why his wife had done such a thing, until Mrs. Livermore explained that having noted the stock market had crashed, she was prepared that Jesse would be badly burned by the crash. Jesse laughed at the thought process, and explained to his wife, that he had made more money than ever, in the Great Crash of 1929. In fact, Jesse Livermore made more than US$100 million in this stock market crash.
Jesse Livermore was so rich and powerful that he never had to wait for a traffic light in New York to turn green. Of course, in 1930s, the traffic lights were manually manned by policemen, rather than eletronically controlled. Thus, when the policemen saw him driving down the road, they stopped traffic on the other side, so that he never had to wait for a traffic light.
Not bad for a boy who came from a broken home, who ran away from home, at the tender age of 14, to try his fortune in this world.
The tragic part about the story of the two men, is that they did not have happy endings. Jesse Livermore eventually committed suicide by putting a bullet through his head. If I am not mistaken, Babcock ended in a mental asylum.
The point I am making is that when bad things happen to people, the same people who were warned, tend to shoot the messenger rather than thank him. Even Jesse Livermore had been investigated for market manipulation and insider trading, for making his US$100 million, although in his case, the investigations failed, and nobody called him a madman. I suppose you would call someone who predicted a stock market crash, and didn't profit from it, a mad man, whilst you would label a man who made US$100 million quietly, a genius ..... a villified genius, nevertheless.
Slightly more than 50 years later, Robert Prechter, the Elliott Wave Guru, stuck his neck out and made extremely gloomy predictions on the stock market in the 1980s. His prediction did not come true, and he has been ridiculed by most people, ever since.
A few days ago, Robert Prechter was interviewed by CNBC's Sue Herera. Prechter admitted that he made a slight error in forecasting that the Dow would climb to a high of 10,000 only, when it climbed to 10,700, but his message that night, was that the Dow was about to fall badly. Subsequently, a few hours later, another fund manager was asked what he thought of Prechter's comments, and he pooh-poohed it by saying that Prechter had been saying the same thing, since the 1980s.
My point - we hear what we want to hear, because we are usually biased. This fund manager heard that Prechter has been bearish since 1980s. I heard that Prechter was bullish until the Dow climbed to 10,000, and now, he has turned bearish.
My messages in this email -
Having said that, I have been asked, "How Low will the Dow go?" in this impending downturn?
I can give you a quick and short answer, like 9,000, but I want my 5 mins of fame in return, to babble on about how great I am. Hahahahaha. I'm just kidding. Instead, I would like to share with you the story of two people, to put my answer in the right context.
Two men have been recorded in history, as having predicted the Great Crash of 1929, amongst the many millions who invested in the stock market then. But why do we even bother to know more about them?
Because it is in human nature that we like to see bad things happen to the heroes and heroines in a movie, but we don't want to personally experience bad things ourselves. There is a tendency to shoot the messenger of bad news when the predicted bad events really happen.
Of the two men who were prescient of the Great Crash of 1929, one ran down Wall Street wailing and babbling about a potential stock market crash, while the other said nothing to anyone about it. Roger Babcock told anyone and everyone who would listen to him, and even those who didn't want to listen, that the stock market would crash, less than a week before it did. Everyone who heard his prophecy thought he was a mad man, because this was a time when people thought that the stock market had reached a plateau where it could not fall lower.
Even after the crash had happened, people did not see Roger Babcock as a knowledgeable man, but instead, held inquiries as to whether he had any insider information to justify his ability to make such an accurate prediction. Possibly, in the 17th century, he might have been burned as a witch?
When the investigators found that he did not have any insider information, they concluded that he was merely a madman, who had "accidentally" predicted the stock market crash. No acknowledgment was made of his skill, neither was there any attempt to learn from him, so that one can be protected from future crashes.
This man, did not live to enjoy wealth and happiness, despite his attempt to protect as many investors as possible. I believe that Roger Babcock did not act on his words, and thus, he never profited from his analysis and market outlook. Almost 80 years later, I saw his book on the stock market being sold in the bookshop, not because there is a great demand for his book, but because it was an opportune time, to print a book written by one of the two infamous men, who had predicted the Great Crash of 1929.
Unlike Roger Babcock, who talked but didn't act, there was another, who acted and didn't talk. His name was Jesse Livermore, the legend of Wall Street. No trader worth his salt, has not heard of Jesse Liverrnore. In fact, no trader worth his salt, has not studied the methods of Jesse Livermore. Billionaire Trader, Paul Tudor Jones, has recommended "Reminiscences of a Stock Operator", written by Edwin Lefevre, as one of the key bibles on trading, that no trader can afford not to study. Reminiscences traces the thoughts and actions of Jesse Livermore, as a trader. Some have thought that Edwin Lefrevre is actually, Jesse Livermore himself, writing under a disguised name, whilst, most believe that Lefevre interviewed Livermore in writing the book. In any case, I have read this book 4 times over the past 15 years. It is a fantastic book.
When Jesse Livermore came home, on the evening of the stock market crash of 1929, his wife had packed and sent away the furniture in his big mansion, to a smaller home they own. He was bewildered as to why his wife had done such a thing, until Mrs. Livermore explained that having noted the stock market had crashed, she was prepared that Jesse would be badly burned by the crash. Jesse laughed at the thought process, and explained to his wife, that he had made more money than ever, in the Great Crash of 1929. In fact, Jesse Livermore made more than US$100 million in this stock market crash.
Jesse Livermore was so rich and powerful that he never had to wait for a traffic light in New York to turn green. Of course, in 1930s, the traffic lights were manually manned by policemen, rather than eletronically controlled. Thus, when the policemen saw him driving down the road, they stopped traffic on the other side, so that he never had to wait for a traffic light.
Not bad for a boy who came from a broken home, who ran away from home, at the tender age of 14, to try his fortune in this world.
The tragic part about the story of the two men, is that they did not have happy endings. Jesse Livermore eventually committed suicide by putting a bullet through his head. If I am not mistaken, Babcock ended in a mental asylum.
The point I am making is that when bad things happen to people, the same people who were warned, tend to shoot the messenger rather than thank him. Even Jesse Livermore had been investigated for market manipulation and insider trading, for making his US$100 million, although in his case, the investigations failed, and nobody called him a madman. I suppose you would call someone who predicted a stock market crash, and didn't profit from it, a mad man, whilst you would label a man who made US$100 million quietly, a genius ..... a villified genius, nevertheless.
Slightly more than 50 years later, Robert Prechter, the Elliott Wave Guru, stuck his neck out and made extremely gloomy predictions on the stock market in the 1980s. His prediction did not come true, and he has been ridiculed by most people, ever since.
A few days ago, Robert Prechter was interviewed by CNBC's Sue Herera. Prechter admitted that he made a slight error in forecasting that the Dow would climb to a high of 10,000 only, when it climbed to 10,700, but his message that night, was that the Dow was about to fall badly. Subsequently, a few hours later, another fund manager was asked what he thought of Prechter's comments, and he pooh-poohed it by saying that Prechter had been saying the same thing, since the 1980s.
My point - we hear what we want to hear, because we are usually biased. This fund manager heard that Prechter has been bearish since 1980s. I heard that Prechter was bullish until the Dow climbed to 10,000, and now, he has turned bearish.
My messages in this email -
- Don't shoot the messenger.
- Try to overcome your bias in listening / reading what is being said. Be objective in assessing what is being said.
- I may be right the first time, but I can still be wrong the second time. Don't make me a hero when I am right, and ridicule me when I am wrong. Instead, focus on what you are going to do for yourself, in light of the information / arguments that I make.
Given the fate of the two men, I seem to be a fool, to attempt to predict a Stock Market Crash / major downturn, as I am doing, and even more foolhardy, to attempt to predict a market bottom. But I believe that whilst I may not yet have the necessary skills, to make me rich, I do have enough skills such that my opinion is worth considering. I also believe that I must have the faith and conviction in my own analysis, and the courage to share them, despite the risk of being belittled in the process when I am wrong. If I have helped some of you save yourself from some losses, or better still, helped you make some money in the process, my effort, and the risk I take today, would be vindicated. Thus, hopefully, if I predict this coming Dow Bottom correctly, I will have a much happier ending. :-)
Having conveyed the above, let's get down to business.
POSSIBLE DOW SCENARIOS
Based on the price movements to date, the probability is high that one of two scenarios will unfold for the foreeseable future. Foreseeable Future means "as far as I can see", until some form of market evidence compels me to revisit / change my prevailing view.
Right now, the Dow will end up forming a complex corrective pattern which I call the WSTR, or else, fall in a Primary Downtrend of a 5 wave impulse structure, in accordance with the Elliott Wave Theory.
For the WSTR, which stands for Wide Sideways Trading Range, the Dow will fluctuate wildly within the trading range of 7,800 to 11,000. This is a basic estimate, for want of more substantive data, which will ensue in the later months. I know that any fool can estimate a trading range that wide, but that's what the WSTR is ..... a wide sideways trading range.
The problem with WSTR is that we only know what will happen AFTER it has happened, and so far, I have not found a reliable way to trade this pattern formation. Unfortunately, this WSTR pattern can last 1 to 2 years, and this can represent opportunity lost, or worse, money lost, if we don't know what we are doing.
Jesse Livermore was caught in such a market condition when he was desperate to make money, and even he, could not make his trading system work, back then. Of course, he attributed some of his losses to the fact that a particular creditor were on his back, chasing his shadow at every turn, and under such pressurized financial conditions, he was not in the right frame of mind. Nevertheless, I believe that the WSTR market condition played a significant part in his losing money. The biggest challenge of WSTR is that by the time you see a trend, with a confirmation, the trend is over, and this goes on, up and down, up and down, for a year or two.
Can we relate this phenomenon from a Global Macro perspective? Yes. For those people who believe that the US Economy will need some time, i.e. a few years, to consolidate before resuming a much more vigorous growth rate, then, the WSTR portrays the ups and downs of such an economy, as market participants grapple with the conflicting economic news as they unfold, thus, the short roller coaster rides within a wide trading range. Please note that whilst the trading range at the two extremes may be wide, the price movement need not necessarily move to the extremes, and this is what causes the WSTR to be extremely difficult market to profitably exploit. The only way to do this with any chance of success is to trade on lower timeframes of 1 hour or even 30 mins. Yet, the lower the timeframe, the less reliable, the technical analysis, despite the supposedly fractal nature of price patterns. This is because it is easier to influence / manipulate prices under very short timeframe.
The other scenario, for those who believe doomsday is round the corner, ...... people like me, then, the other scenario is one of a Primary Bear Market (Long Term Downtrend). Actually, I don't believe economic doomsday is round the corner .... merely that the US Economy, and therefore, the world economy, is going to experience some extremely strong, and bad economic storms that won't go away, any time soon, because it is structural in nature.
Whichever scenario that will finally unfold, will depend on the long term economic fundamentals. Right now, we think we know what the current strengths and weaknesses of the US Economy are. But, frankly, I believe no one knows. There are a few of the economic statistics that show an improved picture, but are subsequently, revised. With revisions that are significant, there is no way to know the true economic picture.
My point is .... if things are improving, why should there be some fairly wide variances between reported and revised economic statistics? To me, this signals a situation that things are not as rosy as it looks. Also, my Global Macro Analysis do not support a positive, rosy picture, although I must admit that I underestimated the strength in manufacturing, especially in the electronics sector. It is not easy to estimate how much inventory, businesses will build, under the present economic situation. What is certain today, is that the electronics sector is much more optimistic than expected, and thus, the heavy investments in inventory building. On the other hand, we can argue that it is merely inventory building, and thus, not sustainable, (my argument some time back), but then, inventory levels have remained low, despite the inventory building, which means that inventories are being sold much more than expected.
Certainly, there are conflicting opinions on the direction, strengths, and fundamental structure of the US economy, and I made one, in the paragraph above, just to illustrate the point. This explains why, both the scenarios I mentioned are plausible. The world is still trying to figure out where the US economy is heading, and this is reflected in the uncertainty in the price movement of the Dow.
This is why we need to continue to monitor the existing price behavior, to see if what we expect, i.e. our reference model which I have mentioned in my email / blog, "Whither the Dow 100205" will come true. If price starts to behave erratically, rather than fall and then rise, in an orderly manner, as in the reference model, then, the WSTR scenario is the more likely option. It doesn't matter what the analysts and fund managers say on CNBC. What matters is HOW they act with the money they manage.
In case, you haven't got the message absolutely clear, we are still at a very early stage where things are still highly uncertain. We need more price evidence, to understand what the market is thinking, and how it is behaving. What is for certain, as at today, is that fear is in the air. What we don't know at this stage, is how far, this fear will take the market down. This is because we don't know what further bad news will be announced in the next few months.
By giving two scenarios, am I not covering myself from all angles and playing the trick that I will be right, whichever way the market goes? No, that's not true. I am saying that there is very limited upside to the market at 11,000. Thus, should the Dow move past 11,000 in the next one or two months, then, obviously I have made the wrong call. At present, I believe that there is very little chance (5%?) that the Dow will go higher than 11,000, and there is a high chance, 65% (just a rough guide, not an absolute probability) that the Primary Downtrend scenario will materialize. This leaves the WSTR scenario with a 30% chance to materialize.
So, let's get down to the ultimate question on your mind. How low will the Dow go, under the Primary Downtrend Scenario?
In my opinion, 4,800 +/- 300 is the most likely bottom. I know it sounds crazy, but there it is.
Best wishes,
Ooi
Having conveyed the above, let's get down to business.
POSSIBLE DOW SCENARIOS
Based on the price movements to date, the probability is high that one of two scenarios will unfold for the foreeseable future. Foreseeable Future means "as far as I can see", until some form of market evidence compels me to revisit / change my prevailing view.
Right now, the Dow will end up forming a complex corrective pattern which I call the WSTR, or else, fall in a Primary Downtrend of a 5 wave impulse structure, in accordance with the Elliott Wave Theory.
For the WSTR, which stands for Wide Sideways Trading Range, the Dow will fluctuate wildly within the trading range of 7,800 to 11,000. This is a basic estimate, for want of more substantive data, which will ensue in the later months. I know that any fool can estimate a trading range that wide, but that's what the WSTR is ..... a wide sideways trading range.
The problem with WSTR is that we only know what will happen AFTER it has happened, and so far, I have not found a reliable way to trade this pattern formation. Unfortunately, this WSTR pattern can last 1 to 2 years, and this can represent opportunity lost, or worse, money lost, if we don't know what we are doing.
Jesse Livermore was caught in such a market condition when he was desperate to make money, and even he, could not make his trading system work, back then. Of course, he attributed some of his losses to the fact that a particular creditor were on his back, chasing his shadow at every turn, and under such pressurized financial conditions, he was not in the right frame of mind. Nevertheless, I believe that the WSTR market condition played a significant part in his losing money. The biggest challenge of WSTR is that by the time you see a trend, with a confirmation, the trend is over, and this goes on, up and down, up and down, for a year or two.
Can we relate this phenomenon from a Global Macro perspective? Yes. For those people who believe that the US Economy will need some time, i.e. a few years, to consolidate before resuming a much more vigorous growth rate, then, the WSTR portrays the ups and downs of such an economy, as market participants grapple with the conflicting economic news as they unfold, thus, the short roller coaster rides within a wide trading range. Please note that whilst the trading range at the two extremes may be wide, the price movement need not necessarily move to the extremes, and this is what causes the WSTR to be extremely difficult market to profitably exploit. The only way to do this with any chance of success is to trade on lower timeframes of 1 hour or even 30 mins. Yet, the lower the timeframe, the less reliable, the technical analysis, despite the supposedly fractal nature of price patterns. This is because it is easier to influence / manipulate prices under very short timeframe.
The other scenario, for those who believe doomsday is round the corner, ...... people like me, then, the other scenario is one of a Primary Bear Market (Long Term Downtrend). Actually, I don't believe economic doomsday is round the corner .... merely that the US Economy, and therefore, the world economy, is going to experience some extremely strong, and bad economic storms that won't go away, any time soon, because it is structural in nature.
Whichever scenario that will finally unfold, will depend on the long term economic fundamentals. Right now, we think we know what the current strengths and weaknesses of the US Economy are. But, frankly, I believe no one knows. There are a few of the economic statistics that show an improved picture, but are subsequently, revised. With revisions that are significant, there is no way to know the true economic picture.
My point is .... if things are improving, why should there be some fairly wide variances between reported and revised economic statistics? To me, this signals a situation that things are not as rosy as it looks. Also, my Global Macro Analysis do not support a positive, rosy picture, although I must admit that I underestimated the strength in manufacturing, especially in the electronics sector. It is not easy to estimate how much inventory, businesses will build, under the present economic situation. What is certain today, is that the electronics sector is much more optimistic than expected, and thus, the heavy investments in inventory building. On the other hand, we can argue that it is merely inventory building, and thus, not sustainable, (my argument some time back), but then, inventory levels have remained low, despite the inventory building, which means that inventories are being sold much more than expected.
Certainly, there are conflicting opinions on the direction, strengths, and fundamental structure of the US economy, and I made one, in the paragraph above, just to illustrate the point. This explains why, both the scenarios I mentioned are plausible. The world is still trying to figure out where the US economy is heading, and this is reflected in the uncertainty in the price movement of the Dow.
This is why we need to continue to monitor the existing price behavior, to see if what we expect, i.e. our reference model which I have mentioned in my email / blog, "Whither the Dow 100205" will come true. If price starts to behave erratically, rather than fall and then rise, in an orderly manner, as in the reference model, then, the WSTR scenario is the more likely option. It doesn't matter what the analysts and fund managers say on CNBC. What matters is HOW they act with the money they manage.
In case, you haven't got the message absolutely clear, we are still at a very early stage where things are still highly uncertain. We need more price evidence, to understand what the market is thinking, and how it is behaving. What is for certain, as at today, is that fear is in the air. What we don't know at this stage, is how far, this fear will take the market down. This is because we don't know what further bad news will be announced in the next few months.
By giving two scenarios, am I not covering myself from all angles and playing the trick that I will be right, whichever way the market goes? No, that's not true. I am saying that there is very limited upside to the market at 11,000. Thus, should the Dow move past 11,000 in the next one or two months, then, obviously I have made the wrong call. At present, I believe that there is very little chance (5%?) that the Dow will go higher than 11,000, and there is a high chance, 65% (just a rough guide, not an absolute probability) that the Primary Downtrend scenario will materialize. This leaves the WSTR scenario with a 30% chance to materialize.
So, let's get down to the ultimate question on your mind. How low will the Dow go, under the Primary Downtrend Scenario?
In my opinion, 4,800 +/- 300 is the most likely bottom. I know it sounds crazy, but there it is.
Best wishes,
Ooi
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