Beware the bear trap
Dow’s ‘goodbye kiss’ previously often forecast further price drops
HOPES THAT THE RALLY by the Dow Jones industrial average since early last month was the start of a recovery on share markets have begun to fade after the rebound was halted exactly on the neckline of the negative head-and-shoulders formation. In technical circles, that’s sometimes referred to as a “goodbye kiss” preceding further falls.
Experienced market players noticed that, as was indicated by an analysis by David Rosenberg at Merrill Lynch. That showed it’s dangerous for investors to become excited about the recent strong rallies of 332 and 302 points in the index within one week. The reason for that is that never in the history of Wall Street has there been a rally of more than 300 points in one day during a bull market. That only happens in bear markets, partly because speculators try to close short positions while there aren’t many buyers.
It’s only during bear markets that 300plus points occur and, in the past, that has often preceded a so-called bear trap. A bear trap occurs when the market suddenly starts looking strong, positive reports appear in the media and some commentators speculate that things are going to improve. Buyers tend to compare prices with the high levels achieved during the bull phase (especially at the time when the head formation occurred) and then buy. That usually results in losses.
An example was during the previous bear market, when a rally of nearly 500 points in the Dow occurred on 16 March 2000. International hopes surged. However, shortly after – on 14 April 2000 – the Dow tumbled by no less than 618 points, hurting many investors who’d landed in the trap.
An important factor that must be kept in mind when a rally occurs is whether it’s taking place due to expectations that the economy and profits are going to improve. If a rally occurs in the midst of pessimistic profit forecasts, it’s virtually certain it will only be temporary.
Only when a rally is based on expectations of higher company earnings should it be taken seriously as a sign the bear market is drawing to a close. On most markets that’s not currently the case. In fact, an increasing number of companies are planning for harder times. Profits are under pressure, as can also be seen in SA, for example, at banks and retailers.
The one aspect where the JSE differs from the Dow is in respect of resources shares. For example, in contrast to the market as a whole, the graph of BHP Billiton is still in a bull market. Optimists believe it’s currently undergoing a bull market correction and only when support levels around R165 to R185 give way does there have to be any concern about a real bear market.
Remarks by BHP Billiton CEO Marius Kloppers after it was announced that the group’s profit in the second half of its financial year had increased by 30% – and the final dividend had been boosted by 52% – make clear why there’s hope that this huge group will continue benefiting from the so-called commodity super cycle.
Kloppers believes that despite price volatility due to the economic downturn , the demand for commodities, especially from China, will remain resilient because of a strong domestic demand. That will support prices.