Chart of the Day: May 2008 redux?

Australian equity investors must always look abroad to the US to indicate the probabilities of future gains or losses on the ASX as binary risk markets continue to correlate (positively: equities, non-USD currencies, commodities; negatively: USD, USD bonds)to each other.

For those who don’t understand or don’t want to believe the impact of world finance on our own bourse, look at Avid Chartist’s recent (but soon to be updated) study of the ASX200 and the SP500, denominated in USD:

Which brings us to todays chart, which highlights these risks clearly, from a study done by Citigroup’s Tom Fitzpatrick (via ZeroHedge).

Setting aside the detailed secondary technical analysis contained within, this chart provides an analog to the October 2007 to May 2008 activity on the S&P500 Index:

From the note comes this warning:

“While we respect the October monthly close on the S&P 500, we did not close above the 12 month moving average…we believe the bear market rally is behind us and anticipate a move towards the 1,000-1,015 target over the weeks and months ahead.”

That target bottom – some 20% below last night’s close – is equivalent to the correction to the 1220-1300 range on the S&P500 before the impact of the failure of Lehman Brothers in late September 2008, therefore is not a call for a repeat of the latter (an avoidable market crash that became a credit crunch), but an extension of a typical bear market, which seems more and more unavoidable day by day.

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Comments

  1. So do the technicals suggest where the market would have gone without the Lehman brothers incident ?

  2. Still waiting for QE3 and hoping (selfishly at teh moment) Bernanke hasn’t learned anything more in the last three years than he did in all the preceding years!

  3. For anyone interested in a fundamental view of the overseas markets (if anyone still cares about fundamental analysis), I’ve built a Dow Jones value index to provide me with an insight as to where things stand – it is an aggregation of the Dow companies.

    Based on my analysis, I think the markets are fairly stable right now. If consensus earnings forecasts are right, then the Dow (and by association the S&P500) could go higher.

    However economic indicators suggest that earnings could be weaker than expected, which supports a Dow at 10,843 compared to the index at 11,836.

    At this point in time, unless everything deteriorates rapidly, I cannot see a 2007/08 re-run.

    If you are interested you can see it here http://macrovalueinvestment.com/?page_id=78.

    • StanGoodvibesMEMBER

      Nice effort, <3 the little shadows under the titles. Also, I hate to be a pendant, but I think the word 'funamentals' has a 'd' in it.

    • Isn’t fundamental analysis of stock indexes completely discredited by the fact that two such fundamentally different market indexes (ASX 200 and S&P 500) track each other so closely???

      If not, why not?

      • Avid Chartist,

        Easy to answer your question.

        The earnings of the Dow group of companies that I track are highly correlated with the ASX20 group of companies.

        The main difference in divergence lies in the fact that the ASX earnings have been more volatile, on top of currency differentials.

        So no, whilst technical analysis is the vogue these days and given that the global economic situation is precarious, fundamental analysis is not discredited or dead. (BTW I do like technical analysis too)

        I personally think the main issue is the lack of insight provided by the majority of those who follow fundamental analysis. I’m hoping to make a difference.

      • Forgot to say that the earnings correlation is explained by globalisation and the fact that everything seems to becoming more and more correlated.

      • Interesting report Macros.

        The “P” in the P/E ratio is why markets are correlated, regardless of underlying macro fundamentals.

        Forward (which I don’t like) and trailing PE’s across almost all developed countries since 2003 have been the same.

        http://www.rba.gov.au/chart-pack/share-markets.html

        So as Macros as done – if you calculate the underlying value of the SP500, its not a stretch to work out from their what the ASX200 (adjusted for USD) should be trading at….

        Its not fair of course, but you can thank financialisation of world risk markets.

      • Prince,

        I think one can also explain it due to the fact that the P is denominated in fiat currency; which all have a problem (debt).

      • I’m curious about the correlation between earnings for the ASX 20 and Dow.
        Do you have any numbers or charts??
        Or is it gut feel?
        Impressive site macros. Each to their own, and whatever works for you, go for it.

  4. I wonder how much of the animal-spirits view of the market takes this as being 6 months later than the previous cycle (i.e. not hitting the October psychological “crunch”… This has us on track to bottom out in April, and that would but a big hole in the withdraw-in-May-invest-in-November strategy 😛

  5. I think the animal spirits don’t know what to think. With all the rumours and inaction the spirits are probably left feeling quite numb!

    • V Raptor – simmer down!!!

      I pointedly said this does not presage a repeat of the GFC, but rather another downturn in a continued bear market (which implies there will be an upturn – eventually)

      I’ve tried to find the post, but its buried in our archive, but I did a study on the likely direction of the 2008 bear market if it hadn’t been for the Lehman Brothers’ failure.

      The market would have probably dropped 20-30%, not 60%.

      So, just to be clear (in my LOUDEST John Cleese voice), this is not a repeat of GFC Credit crunch.

      Although we have the Marx Brothers in Europe, its not a Lehman event (but could be still….Dog I hate hedging my words, but there you have it).

      • Gotta say I struggle to follow the logic of trying to guess what the market would have done if Lehman Brothers hadn’t failed.

        Wasn’t Lehman Brothers failure more a product of the bear market, than the bear market was a product of Lehman Brothers failure???

      • It is just a guess Avid, but the market was spooked beyond anything else when LB was let to fail.

        All the daily losses on the Dow after were much worse in magnitude, compared to the bear market in the first half of the year when Bear Stearns was bailed out.

        Volatility begets volatility…

  6. Pls excuse the late post-working late. Also my ignorance, what is meant by ‘redux’ please? Saw the same in the China post few days ago.
    Tx for the explanation

    btw, where have the Macro 101 tutorials gone?