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Stock Market Battles Between Technical's and Fundamentals

News_Letter / Global Stock Markets Aug 02, 2008 - 02:24 PM GMT

By: NewsLetter

News_Letter Stocks bounced from extreme oversold levels just over a week ago, the imminent low was called for the Dow index on the 14th July, which laid a rough road map for a volatile stocks rally into September 2008. However technical's are at the mercy of two key fundamentals and those are corporate earnings and the deepening credit crisis.


The Market Oracle Newsletter
July 28th , 2008            Issue #20 Vol. 2

Commodities Currencies Economics Housing Market Interest Rates Education Personal Finance Stocks / Financials Best Analysis

Stock Market Battles Between Technical's and Fundamentals


Dear Subscriber,

Stocks bounced from extreme oversold levels just over a week ago, the imminent low was called for the Dow index on the 14th July, which laid a rough road map for a volatile stocks rally into September 2008. However technical's are at the mercy of two key fundamentals and those are corporate earnings and the deepening credit crisis.

The fact of the matter is that financial analysts in the City and Wall Street have a vested interest in giving a positive spin on earnings of the companies that they cover, for the name of the game is in picking stocks that will out perform that of other analysts therefore there exists a tendency to favour on the side of optimism. However virtually all financial analysts are guilty of this which has led to unrealistic earnings expectations for the market as whole of earnings growth rates of over 12% for 2008 at the start of this year. This was totally unrealistic in the face of a slowing economy and deepening crisis in the banking sector as has been written about on a near weekly basis at the Market Oracle.

As actual earnings are announced, analysts are forced to reign in their fantasy land valuations which results in sharp drops in stock prices as if hit by shots out of the blue, much as transpired during the last stocks bear market where the earnings were only cut after stocks had been pummeled into the ground, as neither the CEO's nor analysts admit to being wrong unless forced into an about face which usually hits the whole market across the board.

A recession will mean a fall in corporate earnings of as much as 30%, whilst at the moment analysts are still forecasting earnings growth for this year and next year combined of as much as 20%. Therefore this suggests there is the potential for further serious markdowns in stock prices either in advance of or following further bad earnings reports. All this suggests the stocks bear market looks to have much further to run as Price / Earnings ratios will expand in the face of falling earnings, and therefore pull stock prices lower.

The credit crisis has so far claimed a handful of banks with a further handful teetering on the brink. False optimism reigns that the number of failures will be limited to a dozen or so,but as we saw with the 1990's Savings and Loans crisis, the number of failures kept exploding ever higher until more than 1000 banks and financial's went bust. Today's crisis is in many ways far worse and global in nature, and could in the final analysis claim far more than 1000 banks. Therefore we are still in the early stages of the credit crisis which has deeply bearish overtones for the banking sector and wider economy in terms of availability of credit both for consumers and the corporate sector.

A special free report titled 'How Safe is Your Bank' by Elliott Wave International, exposes the risks to depositors and includes-

  • Five incredibly risky banking conditions.
  • How even the FDIC can't really guarantee your money.
  • The Top 100 Safest U.S. banks (two for each state)
  • How you can choose a safe bank.
  • Tips on international safe banking.

Read the Safe Bank Report Now

In the meantime technical and seasonal factors such as the influence of the US presidential cycle suggest giving stocks a technical uplift into the end of the this year, barring strong corrections along the way in September and in November. For instance the UK's FTSE 100 index on the basis of seasonal technical factors should see a rally back towards 6000 by the end of this year, a move of as much as 13% as the FTSE is giving indications of being in a wide trading range of between 6300 and 5000 that looks set to last for several years.

However technical's are at the mercy of deteriorating fundamentals, the key here is to look for technical triggers generated by fundamental events such as breaks to new lows, and the behaviour of market volatility as measured by the VIX, as pointers to which will have the eventual upper hand and as to what the stock market sees beyond the current phase of the credit crisis during 2009.

Your analyst watching the technicals & fundementals.

Nadeem Walayat,
Editor of The Market Oracle

In This Issue
  1. Misplaced Stock Market Optimism Signals Crash Potential
  2. FTSE 100 Stock Market Seasonal Trend Analysis into End 2008
  3. Dow Jones Stocks Index Major Deviation from Presidential Cycle
  4. Stock Market Roller Coaster- Forecasting the Markets, Where Next?
  5. Stocks Primary Bear Market Trend and Crude Oils Unsustainable Advance
  6. Stocks Bear Market Fed by Falling Earnings Expectations
  7. Broadening Top Megaphone Pattern Predicted Stock Market Crash
  8. Importance of Long-term Trending Markets in Investment Risk Management
  9. Evidence of the US Banking System Teetering on the Brink of Collapse
  10. The Greatest Transfer of Wealth in History is About to Unfold
1. Misplaced Stock Market Optimism Signals Crash Potential

By: Captain_Hook

As discussed in previous commentary, despite the dire realities affecting the global economy, it appears investors are not heeding the warnings. Sure, some people are paralyzed like a deer in the headlights, where you can't blame them if they are just waking up to the reality of what lies before us. However, these still appear to be the few, with most still in denial concerning future prospects for the economy and markets.

Read Article

2. FTSE 100 Stock Market Seasonal Trend Analysis into End 2008

By: Nadeem_Walayat

Global stock markets have performed abysmally during the year to date, with many of the worlds stock markets having triggered technical bear markets on falls of more than 20% from their 2007 peaks. The FTSE 100 index is no exception, which triggered a bear market just over a week ago.

Read Article

3. Dow Jones Stocks Index Major Deviation from Presidential Cycle

By: Andre_Gratian

Current Position of the Market
Long-term trend - The Dow Jones Industrials may be deviating from their typical decennial pattern in an election year. Important cycles going into the Fall could be the reason for this, but one also has to consider the possibility that the downward pressure from the 120-yr cycle, which is due to make its low in 2012-2014 has begun to take effect and that October 2007 was the top of the bull market. This is not yet confirmed and remains a low probability.

Read Article

4. Stock Market Roller Coaster- Forecasting the Markets, Where Next?

By: Prieur_du_Plessis

Financial markets witnessed another roller-coaster week as renewed concerns about the global economy and the health of the financial sector surfaced, resulting in a mixed week for world stock and bond markets, an improved US dollar and continued weakness in oil and commodities.

Read Article

5. Stocks Primary Bear Market Trend and Crude Oils Unsustainable Advance

By: Tim_Wood

In late June I posted an article here explaining that Crude Oil was in an unsustainable parabolic spike. Then, on July 15th I had a short-term sell signal that immediately evolved into a sell signal of intermediate degree. The question now is whether or not this intermediate-term sell signal further evolves into marking an even longer-term top, or if it is a mere correction in the path of an even longer-term advance. Monitoring the Cycle Turn Indicator at the various levels will be key at answering this question.

Read Article

6. Stocks Bear Market Fed by Falling Earnings Expectations

By: John_Mauldin

"The stock market is a voting machine in the short run and a weighing machine in the long run." - Benjamin Graham

The voting part of the equation is tempered by fear and greed. It is largely emotional, although investors like to think of themselves as rational players. That emotion is driven by views of the future. If you can be confident of large and growing returns, you are less likely to be swayed by the erratic movements of a stock. But as confidence wanes? Well, that is the stuff that bear markets are made of.

Read Article

7. Broadening Top Megaphone Pattern Predicted Stock Market Crash

By: Robert_McHugh_PhD

“The Jaws of Death” - The following chart was shown regularly throughout 2007, as we made the point that stocks, specifically the Dow Industrials, had traced out a huge, ominous, major Broadening Top pattern which suggested a long and sharp plunge would follow.

Read Article

8. Importance of Long-term Trending Markets in Investment Risk Management

By: Chris_Ciovacco

Long-Term Investors Need Trends to Make Money - Most of us would prefer to be investors instead of traders. Investors, with an intermediate to long-term time horizon, must be aligned with a positive trend in order to make money. This is true even for value investors who focus on a company's valuation rather than a trend that can be seen on a chart. For the value investor to make money, eventually the position must turn up.

Read Article

9. Evidence of the US Banking System Teetering on the Brink of Collapse

By: Mike_Shedlock

1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.

Read Article

10. The Greatest Transfer of Wealth in History is About to Unfold

By: Ty_Andros

As we look out over the next six months what we see will be extraordinary. The opportunities for prepared investors have never been brighter as the unfolding volatility will be incredible. “Volatility is Opportunity ” for the prepared investor and it will arrive in spades. After a short period of corrective activity I believe explosive moves in almost ALL SECTORS (interest rates, stocks, commodities, natural resources, currencies, and more) lay on the near horizon.

Read Article

For more indepth analysis on the financial markets make sure to visit the Market Oracle on a regular basis.

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