onsdag 6 augusti 2014

My most up to date (technical) view of the European stock market

1. Forget fundamentals; this market hasn't been fundamental for at least 5 years
2. Trends and technicals are tantamount to reading animal entrails
3. Nevertheless, patterns based on group psychology sometimes repeat and history rhymes

Here is a busy chart of the SX5E Index (the 50 largest market cap weighted shares in Europe) with an overlay of some "technical" trends and retracements (Fibonacci)

The market can of course go anywhere, based on minute to minute news about fiscal or monetary policy, natural and man-made (war) catastrophes and so on. For now, however, I limit the "analysis" to trends and countertrends/retracement.

The market in general is expensive and vulnerable enough to warrant almost any %-age drop from here. That gives me some comfort in the below comments, despite their, according to some people's opinion, unwarranted bearishness

I think we have seen the cyclical market peak for this time round. We won't see any new highs for at least a couple or a handful of years. This is now a bear market. The question is only how the path downward will develop. Usually a bear market has more 15% rallies than a bull market but I won't wate any time on forecasting those at this point.

In the beginning of the bear market, the market typically hesitates to go down, the buy-the-dips mentality is still strong after years and years of diagonally rising stock prices. The market almost actively searches for reasons to bounce. At the same time there are negative tractor points with an almost magnetic attraction. These act both as weights on the market and bouncing points, due to the great number of people paying attention to them, having stop-loss limits on them or even pre-set buying opportunity orders there.

Everybody still thinks this is a bull market, and is looking to buy, but it isn't.

Right now, this hour on this day, there is a temporary bounce after a 38.2% Fibonacci retracement of the advance since the bottom last summer. It is at the same time the 23.6% retracement of the rally since summer 2011. After some time here, I expect the market to quickly reach down to the 50% retracement, and after a brief bounce, go further down to the big level (61.8% retracement). That would coincide with 1) 15% drop from intraday highs and 2) last summer's peak ahead of last summer's trough. A 15% correction would be highly normal in any market after such a long and uneventful climb, but after the last 5-6 years it should be seen as a minimum requirement and rather a starting point and a catalyst for the real downturn.

I would say that the more natural local bottom for a serious bounce would be the full 100% retracement of the 1yr rally since 2013 (or the 61.8% retracement of the rally since 2011), i.e. down to 2500 in SX5E cash and thus -25% from recent highs.

There is bound to be 5-10% rallies on the way down, but I think they will be more or less untradeable - just like the very small downturns on the way up proved very hard to profit from - unless you simply bought all the way.

So, buckle up, or go short, or park your money somewhere safe, or buy gold if you dare and wait until there is a big enough drop to warrant a temporary speculation on the upside.

Ultimately I think we will revisit the lows of 2012, 2011 and even lower than the big 2009 trough sooner or later, but I will probably start buying already at the 2012 lows of ca 2000 in SX5E (-40% from highs, and -34% from now). If I had to guess on a timeline, I would say the bottom will occur in the beginning of 2016 after most weak longs have been shaken out of the system, margin lending has been rooted out and perhaps the economy can see the light in the tunnel about a year ahead.

All the above is of course (qualified) BS and Hokus Pokus, however warranted by fundamentals, and should not form the basis of any investment decisions (but mine).

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