Bill Cara: Nervous trading in Japan, Fri., Dec. 30, 2005, 7:01 AM

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December 30, 2005

Nervous trading in Japan, Fri., Dec. 30, 2005, 7:01 AM

On Wednesday I pointed out that a burst of stock buying in the last hour on the Tokyo Stock Exchange (TSE) was unsustainable. Well it continued through yesterday morning before showing some weakness. Then today ~~the TSE Composite Index, which is called~~ the Nikkei 225, waved the white flag of surrender. From the open (16,412) to the close today (16,311), there was a loss of 301 points (-1.84 pct). In equivalent Dow points, that's a loss of "198 points.

Would the U.S. market Bulls be happy to see that in New York today?

I might say stick around, but I won't tease.

However, if losses that are apparent in Europe's early trading, and the state of the U.S. equity futures, are any indication, the year 2005 will end on a sour note.

The question now is whether this is the beginning of the end of the 2002-2006 bull market?

Typically there is some profit taking at year-end in order for some capital managers to show others that they are worth the gazillions paid them for a job that essentially can be done just as well by millions of others. And then in the first week of the new year, the broad market bounces back, which is seen as an indicator of a good year ahead.

This year will likely be different. The first quarter, and probably the first half, will likely be a very bad one if my crystal ball is still working.

Here's my take: if the first ten days is very bad, then the U.S. equity market will have a sharp decline with a hard (spike bottom) landing within six months, and next year's Summer Rally will in fact become the start of the next Bull Market. But if the Bulls and Bears square off in a fairly equal tussle, then there will likely be an extended but softer landing (perhaps Dow=9800).

Clearly, as good as the economy appears to be in the U.S. and in some other countries, I believe that the global equity market will turn bearish for a while. Of course 2005 hasn't been such a good one either. The Dow will close down year over year (I think).

P.S.: Ticklemeelmo, your comment below is an example why I blog. I blog to learn and to share. Thank you. In 2006 I resolve to write more accurately about the Japanese equity market, and I'll know that you'll be there to help. Thanks.

As to Toronto-based money manager Brian Acker, a frequent guest on ROBTV, I actually like the guy. Unlike some of the guests, Brian strikes me as a manager who actually thinks it out before speaking. As to being a perma-bull, he is I gather a fund manager who doesn't play the short side. So he's more or less trapped into telling us why he likes this stock or that one. But I have often heard him give a balanced view, which is something I try to do as well.

But now that you have raised the name, I do think Brian falls into a trap that burdens all these talking heads; he won't tell us about his losers. It's always a case of "Oh, I bought that in May, etc" and when you check, you'll see that he is saying he picked the absolute cycle low. Believe me, if all these money managers bought at absolute cycle lows and sold at cycle tops, they would have no trouble getting 5 pct monthly gains, rather than 5 pct annual gains in their portfolios.

As I have often said, Financial TV -- prior to and following any televised interview -- ought to publish the 1-2-3-5-10 year track record of every fund these people get paid to manage. Then the audience can best size up the advice they were receiving. Of course, that would be very embarrassing to many of these guests. :-)

And I'd like to see regulators compel the financial TV shows to provide archived transcripts so we bloggers could go through the mess and decide for ourselves the good, the bad, the ugly and the really, really ugly. I think there are truly a lot of Don Luskin's out there, but it's hard to say that in a blog unless you have the evidence to support your view.

Posted by Posted by Bill Cara on December 30, 2005 07:01:37 AM | Category: Cara Today in the Market

Discourse

Hi Bill,

still a pleasure reading your blog. On this take, anythink more than your appreciated "cristalball" to support your view? no offense, just want to know.

Carsten

Posted by: Jansing at December 30, 2005 7:43 AM [link]

I am hearing the recent AAII data suggests we are out of danger for January, NOT imho. AAII data bull:bear ratio HAS fallen from it's peak mid November of 3.5:1 to 1:1. Sentiment is only important once participants have acted. How do you know they have acted? Market prices and cash levels. Where is the market? Nearer it's high of the year. Where is cash? Nearer it's low for the year. Suggesting they have not yet been motivated to ACT. Action is propted when fear overcomes greed.

We are now at a point where the growing negative sentiment should begin to impact the market. The normal seasonal bull period is drawing to a close. So the bulls turned bears have been hanging in in hopes of catching the Santa Claus gift. Q1 in this consolidation period (over the past 5 years) has not been positive- while some will talk about the 'best 6 months' the more recent data should be weighed more heavily. Year end to Q1 lows have ranged from -4% to -15% (2001-2005).

Once we have cash at highs for a traling 12 months and prices are substantially oversold on an absolute basis (9800 is a good number for the 1st trip down) and relative to bonds (stock:bond ratio) AND sentiment has hit it's low of about .5:1 then the risk reward will have shifted in favor of a more aggressive position- no matter how negative one is on the longer term picture.

After the lows are in for the year I would agree with a new cyclical bull market with significant upside from the lows- perhaps 50%? by 2008. The key to benefiting from that gain will be identifying when the lows are in.

I do not rule out a test of the 2002 lows, around 7000 on the DJIA. The lows are unlikely to be in before Q4. A 50% gain off a low of 7000 should get us back to 10500-11000, right about where we are now.

With that negative bias considered I will respect paragragh 3 of this comment from a trading perspective.

Posted by: stockman at December 30, 2005 7:59 AM [link]

Hey Bill,

I'm a long time reader of this blog. I have to say, your honest, straightforward manner to explaining the tactics of the "sell-side." I don't always agree with your view, but I feel a lot better knowing it's there. Kinda balances out the Brian Ackers of the world. Perma-bear plus perma-bull equals balanced viewpoint and informed investors. That is a step towards social equity.

That being said, I felt I had to comment about a possible inadvertent mistake on this topic. You mentioned that the Tokyo Stock Exchange Composite is called the Nikkei 225. I'm afraid you may have been misinformed. As a Canadian investor located in Kyoto, Japan, I feel obliged to tell you that the Nikkei is located down the road from me in Osaka. The more commonly followed Nikkei (similar to the S&P500) is located in Osaka because, until the middle of the 19th century, Osaka was the economic hub of Japan.

The TSE, which is actually located in Tokyo, is properly called the Tokyo Stock Exchange Composite Mothers Index, but is usually referred to as the TOPIX. The TOPIX (similar to the Dow) is composed of the giant Japanese companies that formed after WWII and are now all headquartered in Tokyo.

Your reference to the Tokyo exchange as the Nikkei may not be significant to investors residing in Canada, but accuracy is important, especially for an accountant. As a comparison, how would you feel if the Toronto exchange was referred to in the American media as the Canadian Venture Exchange (Vancouver)? Having lived in all four cities, let me tell you that the differences between Osaka and Tokyo are quite similar to those between Vancouver and Toronto.

Posted by: ticklemeelmo at December 30, 2005 10:05 AM [link]