Betting on the market’s direction

Considering how the market has been performing, my article last week was quizzical or simply hard to believe. It mentioned the possibility of a hard market fall sometime in April or May that may be precipitated by a sharp drop of stock prices on Wall Street following a commentary by Mark Hubert of Market Watch, which compared the current path of the US market and what it was right before the 1929 crash.

The commentary spoke of an “eerie parallel” in the chart pattern of both markets, a similarity which he says he first noticed and wrote about it way back in November. With the movement of the present market superimposed on the 1929 chart (or the other way around), Wall Street may possibly continue to rise until the later part of February. However, as explained, it will “face a rough” time in early March and eventually nosedive between April and May.

In February 1929, the Dow Jones industrial average (DJIA) was near 400.  When it nosedived between April and May, it fell somewhere the 200 point-level or 50 percent lower.

On the adjusted chart—dispensing with the technical calculations made to just simply show the visual trend—the present market is projected to drop down to somewhere between 25 and 35 percent from the top.

When he first brought out the idea in November, Hubert said people laughed at it and even called his work a “shameless exercise.” Lately, however, he claims there are fewer and fewer people laughing at his commentary now.

A similar—and seemingly a follow-through—article on the subject came out last week. It was titled “Crash of 2014: Like 1929, you’ll never hear it coming.” It was written by Paul Farrell, a former investment banker, “author of nine books on personal finance, economics and psychology, including The Millionaire Code, The Winning Portfolio, The Lazy Person’s Guide to Investing.” As also disclosed, Farrell has a Juris Doctor and a Doctorate in Psychology. On Market Watch, he writes a column on behavioral economics.

Farrell unconditionally supported Hubert’s thesis. But what he was pointing out, this time, is how the event will come to pass: It will happen in the same way it had always happened in the past. As he puts it, “the warnings are always long and loud” yet nobody seems to always see it coming like “a thief in the night” when it strikes.

Predicating his commentary with the 1929 crash that led to the depression, he said none seemed to have listened despite prior warnings: In March 20, 2000, we warned, he said. Few listened. The same happened in the “1990s dot-com mania.” Warnings “roared from 2004 into 2008.” Again, few listened, he added. In the case of the dot.com fallout, Farrell reported that some $8 trillion in asset value was lost. It also led Wall Street into the bear-market recession of 2000-2003. In the 2008 meltdown, too, about $10 trillion in asset value went into smoke.

Deflation

Among the possible answers available to explain why the perplexing proposition could possibly happen under current market context is by deflation, a recent concern that is suspected threatening the world economy now, the US included.

Generally, deflation is understood as an across the board decrease in price levels of goods and services. Deflation is sometimes called negative inflation because deflation comes about when the inflation rate falls below zero percent. It is different from disinflation, which, according to references, is nothing but a “slow-down in inflation rate.”  Thus, disinflation is but a phase of inflation on a decline.

As explained, inflation “reduces the value of money over time.” Deflation “increases the real value of money,” the result of which makes one “to buy more goods with the same amount of money over time.” While the above definition makes deflation look good in the logic of the ordinary man-on-the-street, it is “a problem in a modern economy” because it “increases the real value of debt.” It may, as a result, “aggravate recessions and lead to a deflationary spiral.”

References say, too, that “not all episodes of deflation correspond with periods of poor economic growth.” One example was during the US civil war. Deflation came about out of the “technological progress” at the time “that created significant growth.”

At present, one report observed that producer prices have been falling: “Consumer prices have been falling for the last 6 months in France and Germany; in Japan wages have actually fallen 4 percent over the past year. Until the recent crises prices were falling in Brazil; they continue to fall in China and Hong Kong; they will probably soon be falling in a number of other developing countries.”

The report continued to say, “So far, none of these price declines looks anything like massive deflation that accompanied the Great Depression. But the appearance of deflation as a widespread problem is disturbing, not only because of its immediate economic implications, but because until recently most economists (including the author) regarded sustained deflation as a fundamentally implausible prospect, something that should not be a concern.”

As summed, the kind of deflation suspected to be stoking the world economy “falls within more or less conventional economic theory.” Accordingly, it can be easily prevented by monetary measure “like printing money.” The problem or drawback is that it’s not completely free from political influence.

The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com.