2011: Deja Vu or New Highs?

As a student of Economic History, I prefer to look at the "future through the prism of the present" (even in the sphere of personal experiences, nature, economy, markets, etc). A number of friends often respectfully disagree with my outlook. I am often considered, I believe wrongly, to be a perpetual pessimist - which I am not. At different points of time, I am very bullish on certain commodities, products, assets, etc while concurrently being extremely bearish on others. At the current juncture, if I am asked to be bullish on certain assets (on a macro-basis for the next 3-5 years), then it would be Coal, Food and Silver. Oil would be the next. The problem with oil is that it has a different set of dynamics. My optimism on these assets is mostly on the basis of what I perceive to be a structural shift. My bearish list would probably be ten times longer than the bullish list. Top of the pessimistic list for the next three years include China and Europe (which a lot of people would concur). What makes me particular worried is that if one were to look at the newspaper stories at the end of 2007 (without the date) then they could be forgiven to think that they are reading the newspapers over the past month. Optimism pervades through the popular press (usually a contrarian signal that suggests caution). It is almost certain that by the end of the first 3-6 months of 2011, every body would be boldly declaring that Great Recession has been buried in depths of history (which I hope will actually happen, though I am not so sure). 

A more interesting perspective is indicated by looking at the Charts (Technical Analysis). They, very curiously, seem to indicate that the time has come to look at things in two diametrically opposite methods: either the markets are heading for new highs or new lows. Such indications, to if my memory serves me right, have been emitted only once: late 1999. I am therefore reproducing charts of some asset classes and indices. Interestingly, there are some anecdotal factors that seem to indicate that we have some similarities with various past major turning points. The warnings by Cisco (the last two times they warned about earnings was in early 2000 and mid 2007). Shanghai Composite has not been moving (see long-term Kagi Chart given below). 

It is pertinent to note that moves on the Shanghai index has traditionally preceded moves in the other global indices.

The other charts are more interesting (all of them are based on closing values for the week ended 25 December 2010). There are two ways to interpret the Copper chart (below).

The weekly Chart (above) of HG Copper traded on COMEX. It seems to indicate that there is a possibility of a huge up move. It seems to indicate that copper could be headed for its more immediate target of 4.4 (it is now about 4.26) and above that to 5.08 and in the best case scenario 6.60 over the next 1-2 years. However, there are huge negative divergences on the chart. The Relative Strength Index has been witnessing lower tops and when they appear on the weekly charts, there is a high probability that they could head for new lows. 

The chart of India's National Stock Exchange's Nifty Index is similarly placed. 

The weekly Kagi Chart is placed in a manner that a 3-4 percent up-move could trigger a long-term buy signal that has the theoretical potential to take it up to the old high and, if that is broken then it has the potential for a phenomenal rally over the next three years that could take the index to even 10,000 point level. Like HG Copper Chart, the massive negative divergences seems to indicate that there is a high probability of a new low, unless things change dramatically over the next 2-3 months in the global economic fundamentals.

It is imperative to think that these are theoretical probabilities based on my interpretation of the charts, while I hope the upside analysis comes true, at the end of the day, I don't know if they will come true. The markets have a knack of doing things that are the exact opposite of what people think they will. This reminds me of the market adage: Don't follow the crowd they are usually wrong.

I would speculate that new lows and new highs are possible in the next 3-5 years. It is possible we are heading for a sharp down move that would be triggered by events in EU and other countries. In order to combat these troubles, Central banks are bound to loosen the spigots to unprecedented levels, which could lead to an era of hyper speculation. While it is easy to speculate on somebody's speculations, one should probably be more sympathetic to the Central banks, who have to fight the worst crisis in a century with their hands tied to their backs while driving blind.

History has a knack of repeating itself, if not in toto, by rhyming. Hence it pays to keep track of historical developments. The chart below shows the eerie similarities of the market movement in aftermath of the crash of 1929.