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Below is an interesting excerpt from Aaron Task's column at TSC.
Seems to be a pattern match between Nasqaq & Nikkei from 1990. If
the pattern continues, Nasdaq could go as low as 1800...
JW
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What a Week: Political Uncertainty, Economic Concerns Roil Economy
By Aaron L. Task
Senior Writer
11/17/00 8:18 PM ET
http://www.thestreet.com/markets/aarontaskfree/1179165.html
Eyeing the Bear
As reflected by the gurus' call on Tuesday, the general feeling on
Wall Street is that Monday's lows will prove to be the "final" bottom
investors have long been groping for. But every bottom so far this
year has ultimately proven porous.
That being the case, prudence dictates we give equal time to those
with a far more pessimistic view, which Don Hays, president of Hays
Market Focus Advisory Group in Richmond, Va., certainly expressed in
a conference call Friday afternoon.
Hays began the call by noting an "amazing correlation" between the
Nasdaq Composite's performance throughout this year and Japan's
Nikkei Index in 1990.
Most recently/prominently, Hays noted there was a 32-week period
between the Nikkei's peak in late 1989 and when it ultimately broke
through the lows established in what he dubbed "phase one" of its
post-bubble bear market. Last week marked the Nasdaq's first break of
the lows it hit during its first big downturn, or 35 weeks since its
peak in mid-March.
Additionally, both averages reached previously unmatched valuation
heights at their peaks, he said, noting price-to-earning ratios of
both markets were justified by talk of "new eras" that made old rules
obsolete.
If the Nasdaq continues to follow the Nikkei's example, the index
will continue to decline for the next six to 10 weeks before it
reaches the ultimate bottom of this "second phase" of the bear
market, Hays predicted. He forecast the end of phase two will come
after a "climactic four-five days that will really knock the stuffing
out of the market" and take the Comp to as low as 1800 -- or more
than 40% below Friday's close.
Hays' draconian market view is accompanied by an expectation the U.S.
economy will soon enter a recession and that the world economy faces
additional deflationary pressures for several years. Reflecting such
pressures, long-term U.S. Treasury bond yields will approach 4% by
next October, he predicted.
The veteran market watcher -- who recanted a long-held bullish
outlook in early 1999 -- also warned the Comp's P/E, while well down
from its peak of 264, is still a historically high 124. Additionally,
the earnings yield of the S&P 500 (12-month earnings vs. 10-year
Treasury note yield) is 28% overvalued, he contends.
On the monetary front, MZM money supply growth fell under 7.5% on an
annualized basis in the first quarter of this year, Hays noted,
calling that a key "trigger level" signaling "excess money has dried
up." MZM growth has picked up a bit recently, but the trend is
of "withdrawing fuel from the bull market machine," he said.
Regarding psychology, consumer confidence remains high, in
conjunction with low unemployment and as reflected by workers'
confidence in their ability to change jobs voluntarily. That outlook,
plus higher oil prices, is key to the Fed having to maintain a
restrictive monetary policy, Hays said.
But at the same time, benefit costs are rising in the employment cost
index, which is pressuring corporations' profit margins.
Other psychological indicators he cited included the still-high
bullish sentiment and continued heavy selling by corporate insiders.
The equity put/call ratio is recently suggesting investors are
becoming more cautious (which is good from a sentiment
standpoint), "but it by itself cannot keep psychological indicators
afloat," Hays said.
There was more, but I think you get the gist. To those who think by
publishing Hays' views I am condoning them, note I give (more than)
equal time to the mostly bullish Wall Street gurus.
The point is that those folks haven't been too accurate of late and
maybe it's time to at least consider the other alternative. That's
assuming you haven't already after yet another vexing week on Wall
Street.
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