US stock market: Not too late to get out
13 June 2002
According to an article in The Business Times today, Singaporean investors are finally winding down their trading activity on Wall Street.
I would say it is about time. According to The Business Times, this came "after a year in which Singapore investors - the biggest Asian traders on US stock markets after the Japanese - bought and sold 35 per cent more shares than in 2000". The report adds: "In contrast, other Asian investors - led by the Japanese - had already headed for the exit. Deals by all Asian investors on the US bourses last year dropped 27.5 per cent to US$369 billion."
So Singaporean investors had been relatively slow in recognising the deteriorating prospects for the US market. In fact, they may still not be fully convinced. According to the report, despite winding down their trading activity on Wall Street, "Singapore investors have continued to be net buyers of US stocks - although in much smaller amounts. Their net purchases sank 87 per cent year-on-year in the first quarter to US$738 million."
The risk to these investors still holding on to US stocks is very real. Other reports in today's edition of The Business Times highlights the risk. For example, a report extracted from The Los Angeles Times-Washington Post News Service states in response to the Nasdaq 100's recent falls: "Nearly nine months of gains by an index of the 100 largest technology stocks were wiped out on Tuesday, leaving the index lower than it was on Sept 21 - the date commonly regarded as the low point of the bear market."
Ominously, the report adds: "Now the fear on Wall Street is that the Nasdaq 100 is just the first of the major indexes to erase their post-Sept 11 gains, once thought unlikely." The report suggests that "if the other major indexes fall below their Sept 21 levels, strategists would rethink their bullish scenarios, at least in the near term".
The report suggests that some strategists have been "hoping for a sell-off that would represent 'capitulation' for the bear market that began in March 2000 - a last-gasp, panic sell-off when investors finally get rid of their losers".
It adds: "In theory, only such a capitulation would enable the market to turn bullish again. Sept 21 has been widely regarded as the bear market's capitulation because of the size of the market's losses and the panic that accompanied it."
However, it is questionable whether analysts themselves have capitulated. On Monday, three prominent strategists said stocks will rise by year-end or just beyond. Banc of America Securities US market strategist Thomas McManus increased the equity portion of his model portfolio from 50 to 55 percent and thinks the Standard & Poor's 500 (S&P 500) will be up 11 per cent by this time next year. The widely followed bull of the late 1990s, Goldman Sachs' Abby Joseph Cohen, remains as bullish as ever, setting a six-month to one-year target of 1,300 for the S&P 500. Salomon Smith Barney's Tobias Levkovich cut his target for the S&P 500, but still expects it to rise to between 1,200 and 1,250 by the end of the year.
One bear, however, is Merrill Lynch's chief US strategist Richard Bernstein. He believes the market hasn't yet touched a bottom. According to Bernstein, his clients have been asking him whether the market has hit a bottom. "Investors typically do not ask that question at true market bottoms because they do not believe there will even be a bottom in sight," he wrote in a Monday research note.
Technical readings suggest the US market could head lower. According to another article in today's The Business Times, OCBC Securities thinks that the Dow and Nasdaq are not supported at current levels.
"A head-and-shoulder formation on the Dow suggests a move towards 9,000, while the Nasdaq Composite has very little support until its September low of 1,387 points," the research house said in a morning report to clients.
On PrudentBear.com, a website for money manager David W. Tice's mutual fund, a guest commentary by Tim Wood on 3 June 2002 pointed out an ominous development. Wood, publisher of Cycles News & Views, highlighted the fact that since 1896, there have only been five times in which the 4-year cycle in the Dow has made a top within 20 months or less. "Every 4-year cycle that has topped in 20 months or less has 100% of the time taken out the previous 4-year cycle low," he wrote.
According to Wood, the last 4-year cycle low occurred in October 1998 at 969 on the S&P 500 and in September at 7,615 on the Dow Jones Industrial Average. The top of the current 4-year cycle occurred in March 2000 at 1,535 on the S&P 500 and in January 2000 at 11,723 on the Dow. "This means that the count (number of months from the 1998 lows to the 4- year top) is only 17 months for the S&P and 16 months for the Dow," he wrote.
"This indicates that 969 on the S&P and 7615 on the Dow are minimum down side objectives for the current 4-year cycle low, which is due to bottom sometime in late 2002," Wood concluded.
The main support for the US stock market is the recovery that the economy is presumed to be undergoing. But recent data puts even that in doubt. While consumer spending has remained surprisingly resilient, capital spending has not picked up to the extent that had been hoped for.
As a result, corporate earnings remain weak, which in turn translates into high stock valuations. Even after the recent correction in the market, the market P/E ratio remains at around 40, while prospective P/E is just under 20, compared to its historical norm of around 15.
Those Singaporean investors who remain heavily invested in the US stock market may be well advised to review their holdings.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.