Outlook for the Final Three Quarters of 2008

Author: [Site Administrator]
Source: [Fund Analysis]
Article type: Regular article
Published: 2008-3-21 18:36:43
Column: Expert Perspectives

Last December, this column provided an outlook for this year's market. The conclusions from that time all remain valid, and many are being confirmed. Since Q1 is not yet over, final results cannot be drawn, but some things are already settled — for instance, the prediction about the abundance of "pit-falling" opportunities this year. After these three months, everyone should have had some experience with that.

Since there is nothing to revise, this column will follow the original outlook's framework, expanding with more precise guidance based on new developments for the remaining three quarters' trading.

In the original outlook, this column provided the rhythm for this year as "rally - decline - big rally - big decline." Currently, the "rally - decline" phases have played out: the "rally" from 4778 to 5522 and the subsequent "decline" constituted Q1's rhythm. Some may think the 4778-to-5522 move hardly counts as a rally — that's because their thinking is still stuck in the single-direction-up mindset of the past two years. In a major correction, a rebound of that magnitude is already plenty "rally."

5522 is 600 points below 6124, and is 1/6 of 3600. This is a noteworthy point-level rhythm. If this rhythm continues, then 4922 becomes a strong medium-term resistance level. 4778 is exactly 1350 points below 6124 — 3/8 of 3600. Therefore, the next low is most worth watching at twice that magnitude — the 6/8 position — which corresponds to 3424. Absent a special global crash event, the probability of the "decline" phase's bottom ultimately forming near that level is extremely high. Generally speaking, the final bottom falling within a +/-3% margin of error from that level would indicate it is effective.

It can be asserted that after this "decline" from 5522 concludes, the third phase of the original outlook's rhythm will arrive: the "big rally." The concept of "big rally" means its magnitude must exceed the "rally" from 4778 to 5522.

To more precisely describe this "big rally," we must first return to another prediction from the original outlook: that this year the market will test the annual moving average at least twice — the first time being comedy, the second tragedy. Clearly, both the comedy and tragedy were entirely performed within Q1. Due to the sudden secondary offering by Shanghai Pudong Development Bank, the upward comedy after the first break of the annual MA lasted fewer than 10 days, then the second break occurred, launching the subsequent tragedy. March 4 was the day that ultimately confirmed the annual MA could not be effectively reclaimed.

But since the annual MA currently still maintains an upward trajectory, the subsequent "big rally" will necessarily launch another assault on the annual MA. A very important technical signal is: once the annual MA flattens, if the market still cannot get back above it, then once the annual MA turns downward — that is when the truly major correction begins. So in a sense, everything so far has only been a rehearsal for the major correction, because after all, the annual MA hasn't turned down yet. If the upcoming "big rally" cannot hold above the annual MA and push it higher before it turns, then the subsequent "big decline" will make Q1's "decline" pale in comparison.

Even if the upcoming "big rally" can hold above the annual MA and attack upward, thereby delaying the annual MA's turning point, since the monthly MACD has just formed a death cross, under such technical conditions, a forceful upward attack leveraging concepts like index futures or the Olympics to even make new highs would, at best, create a MACD double-top pattern. What corresponds to a MACD double-top is — you guessed it — an even sharper decline. Anyone with basic technical knowledge should be no stranger to the killing power of a MACD double-top, and this is on the monthly chart — its destructive force and duration speak for themselves.

From the most intuitive technical standpoint, the next truly major rally cannot begin until the monthly MACD returns to near the zero axis. In the meantime, everything is just small-scale noise.

Fundamentals also fully support the above technical analysis. Current valuations are entirely premised on the high-growth backdrop of the past two years and remain at very elevated levels. Once the economy levels off, these high valuations will lose all support, and a structural decline in earnings is foreseeable within the visible future. Therefore, those currently deemed "blue-chip" stocks all face enormous medium-to-long-term earnings pressure, and current prices are all excessively high.

Moreover, world economic experience tells us that after major commodity speculation waves pass, they always leave devastation. America's economic problems are far from resolved. These external time bombs can detonate at any moment, shattering the fantasy of continued high-speed economic development. Only then will the true correction pressure truly manifest.

It is very likely that we are about to face a difficult period of major global economic adjustment. Our current economic structure, having squandered too many opportunities to grow strong on our own terms, is absolutely insufficient to insulate us. The difficulties ahead may exceed what most people currently imagine, because historical experience tells us: the truly frightening correction pressure comes from the economic fundamentals. And we are very likely about to face just such a crisis.

Regarding individual stocks, the original outlook already made it clear: themes — the repeated speculation of various themes — will be the dominant motif for a very long time to come. In major correction environments, historical experience repeatedly proves that low-priced theme stocks are an evergreen theme. Since the current volume of capital is more than sufficient to speculate on low-priced themes even amid a major correction, as long as speculative capital exists, these are phoenix stocks — ready to take flight at the first opportunity.

In a word: for a very long time to come, the market will be the graveyard of long-distance runners and the paradise of sprinters.

From a 20-year perspective, this correction remains a mid-course continuation adjustment within a super bull market. But the 20-year premise is that you can survive this winter. Otherwise, a 20-year super bull market is meaningless to you.