Mr Market to take on doom and gloom

04 July 2010 - 02:36 By Jeremy Thomas
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Fresh off the worst quarterly performance since the dog days of 2008, global stocks would appear to face new nightmares.

Technical analysts of a bearish bent are rubbing their hands at the sight of the fabled "head and shoulders" pattern on the charts of the Dow Jones, S&P500 and Nasdaq (along with just about every other major share index in the world, including the JSE All Share and Top40).

Fundamentalists, too, can see little in the forward numbers to inspire hope. Stock prices, in one of the unwavering rules of history, follow earnings over the long term, and the earnings projections for leading multinational companies are poor, to say the least.

This week saw the release of a spate of research into the health of the manufacturing sectors in top economies. All of the purchasing managers' indexes, from the eurozone to the US and Asia, were negative - with SA's PMI no exception. There is little apparent confidence that things will get better in 2010.

The only fly in this muddy soup of bad news is Mr Market.

This mystical, moody beast, an explosive mixture of universal fear and greed, is prone to the most confounding attacks of contrariness. Just when "everybody" expects apocalypse, Mr Market tends to calmly dish up the exact opposite. Right now, who would bet against a relief rally that goes precisely against what all the surveys and chart analyses are forecasting?

Elliott Wave theorists say sentiment is at the heart of every surge and suck the markets make. It's pointless, they say, looking for past "reasons" when prices act as they do. Greater forces, rooted in the collective subconscious, prompt buyers and sellers to flee or embrace risk.

It may ring of mumbo-jumbo to unbelievers, but the chart junkies will furnish evidence to prove that "supernatural" forces cause human behaviour to fall into distinct patterns. The stock market, for instance, doesn't randomly tick up and down; it rises and falls in cycles, which, with an educated eye, can be predicted. The Fibonacci ratios that dictate the shapes of sunflowers and seashells also govern the animal urges of homo sapiens - which will reflect on any graph drawn to mark their commercial activity.

I suspect this is the point at which many people will be stifling their chortles.

Chuckle away, say the likes of Robert Prechter and his disciples in the science of "socionomics". In his June bulletin, the Elliott Wave guru had this to say: "For the unprepared, trouble is not just knocking on the door; it's about to kick it in."

Other experts, such as Tim Wood and those hewing to doctrines such as Dow Theory, reckon we're in for a "primary trend change" driven by a stew of negative factors, not least of which is a hostile inflation outlook. John Hussman, one of the more respected fundamental analysts and fund managers, points to governments "behaving badly in terms of fiscal and monetary discipline". This climate, he concludes, will probably induce a fall in prices of most assets - possibly excluding gold but, importantly, including real estate.

The most talked-about collapses this week were the prices of copper and oil, both hit hard by nervousness about China's economic expansion. Together with Europe's travails and fears of debt contagion, the world is not exactly sitting pretty.

But, for all that, we'll see what the redoubtable Mr Market has to say, shall we?

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