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Green Shoots? Or Day of the Triffods?

23 Jul 2009 20:07Peter Waring

3 reasons to be very afraid.....

Unemployment is rising, companies are dropping like flies, pensioners are being forced back into the work force, and yet the stockmarket and housing markets are rallying. Something does not make sense? Or perhaps our model of looking at finance needs changing. If there was ever evidence that market participants follow the unconcious herding instinct and do not follow ‘logic’ then that time is right now. As Rob Pretcher from The Elliot Wave Principle says – the markets are a reflection of endgenous behaviour (coming from within the market itself) not exogeneous behaviour (caused by reactions to external events). On any given day the press will find some ‘good’ or ‘bad’ news to fit what the markets did.

As the market rally wears on, one by one bears are leaving the bear camp and joining the bulls. Once they have all but left … then the market will be ready for the next leg down. As a friend of mine who is a hedge fund manager says “its very hard for a market to go up when everyone is long”. The same applies in reverse. It is hard for the markets to go down if everyone is in doubt, and therefore shorting the market.

In the meantime here are 3 reasons to rethink the “Green Shoots” theorems – perhaps things are not as rosy as they seem?

Reason 1: World Industrial output tracking the Gt Depression nicely

World Industrial Output since crsis vs the Gt Depression

World Industrial Output since start of the crisis vs the Gt Depression

Reason 2: World Stockmarkets – making the Gt Depression seem like  a joke in comparison

World Stockmarkets

World Stockmarkets

Reason 3: Volume of World Trade declining faster than the Gt Depression

Volume of World Trade since start of crisis vs Gt Depression

Volume of World Trade since start of crisis vs Gt Depression


The pictures above speak a thousand words. If we concentrate on the Stockmarket for a moment, it is obvious that World Stockmarkets on the whole have fallen much faster since the start of the Credit Crisis than they did in the Gt Depression of 1929-1932. If they fell faster then they were due a bounce – and this is exactly what we are getting now. As I pointed out in my post Dead Cats can bounce pretty high especially if they were thrown from a great height – things were looking pretty oversold in March and we are getting the classic relief or “suckers” rally. Of course I could be wrong about this, but I for one am not ready to leave the bear camp just yet. Show me P/E ratios of the major indices in single digits, and then we’ll start talking :-)

Peter Waring

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