I did an interesting segment on CNBC's "Squawk Box" last Friday about the possibility of the Dow hitting 6000. Below are the notes I made in preparation for that segment. They reflect my concern about the failure of the Obama administration to deliver a well-targeted fiscal stimulus and a coherent bank bailout plan. Juxtaposed against the continued deterioration of the global economic environment, this failure does not bode well for the markets. To view segment, click here or go to:
BodyDOW 6000 CNBC Talking Points
Intro: Navarro uses a combination of “macro” fundamental analysis and technical analysis to handicap the market direction and trend. Using this approach, Navarro accurately called the top of the stock market in October of 2007 (issuing a call to cash in November 2007). Since that time, he has accurately characterized the market to be first in a downtrend and then in a sideways pattern and urged risk-averse investors to remain in cash.
• Since rebounding from its low in November of 2008, the US market has been in a sideways trading pattern while the Dow Jones industrial average has held a strong support level at 8000 -- until recently.
• This technical sideways pattern speaks to an underlying fundamental analysis truth: The failure of the market to establish either a bullish or bearish trend reflects the market's uncertainty about both the severity of the current global downturn and the ability of policymakers to engineer a recovery.
• Currently, both US policymakers and policymakers around the world are in a race against time: The global economy is deteriorating at an increasing rate. In the thus far vain attempt to stay ahead of this recessionary tide, policymakers are increasing their various fiscal and credit market fixes at an increasing rate. So far, recession is triumphing over Keynesian solutions.
• Two concerns about the Obama administration's plan now trouble the markets. One concern is that the fiscal stimulus-bailout will be too little too late to stem the recessionary tide. Equally troubling is the concern that the massive size of the policy solution will lead to a debased currency, soaring inflation, and spiking interest rates down the road. Neither scenario doth a bull market make.
• That the Dow has broken through a critical support level now that both the fiscal stimulus package and the bank bailout are in place is an extremely ominous sign. With that support level broken, the downside risk is substantial.
• If the global economy continues to deteriorate at the rate it is doing so, a Dow at 6000 has gone from the unthinkable to the quite plausible. Remember: All stock prices reflect is the expectation of the future stream of earnings. If investors now believe the recession is going to be longer and deeper than they believed yesterday, stock prices must resume their downward trend.
• Watch carefully than to see if the Dow can at least regain its sideways movement. If, alternatively, the Dow resumed its downward trend, 6000 here we come.
Please forward this newsletter to a friend!
Other Things You Might Like
- Data Analytics for Corporate Debt Markets: Using Data for Investing, Trading, Capital Markets, and Portfolio Management
- Rule Based Investing: Designing Effective Quantitative Strategies for Foreign Exchange, Interest Rates, Emerging Markets, Equity Indices, and Volatility