March 18th, 2008

Foreign Markets Leading the Way to a ….?

I find today’s market totally baffling….no I’d call it bizarre. What I’m talking about is the divergence between the actions of international markets vs. the action of our markets. Take a look at the closing of various markets around the world after the Bear Sterns deal with JPMorgan Chase was announced late Sunday night:

With markets around the world (with the exception of Australia and Japan) dropping 2-5%, the Dow 30 actually increased .18%, the S&P500 Index declined less than 1% and the NASDAQ Composite fell 1.6%.

I’ve written here several times about the degree to which foreign stocks have so dramatically out-performed US stocks, the most recently on July 24, 2007, almost exactly at the birth of the sub-prime credit crises, when I wrote (you click here and read it, it’s amazingly prescient):

While market increases seem high by historical standards, the global economic environment has no precedent. My guess is that the market will continue driving higher, continuing to catch up to foreign markets or, at the very least, staying even with them. This party won’t end until and unless there is a slow-down brought about by a major external even of a global political, social or economic variety.

So when I heard of the Bear Sterns buy-out/salvage/liquidation, or whatever it was, I turned on CNBC on Sunday night (a rare event) and was surprised to see broadcasts from Japan and Australia and India as their markets were opening to huge declines. I continued watching for the remainder of the evening wondering whether the “crash” I’ve been expecting was about to materialize. Was I fully prepared? Should I have purchased more UltraShort ETFs, more gold, more forex ETFs? Should I have sold my remaining long positions? What was in store for tomorrow morning’s market open?

The futures indicated a 200+ point drop on the open and the market didn’t disappoint. But by the close, the whole loss was reversed. Does that mean a bottom? Did the foreign markets reach the wrong conclusion and over-react? Or were they more on the mark and the US markets have only postponed the inevitable? I think it was the later. I think the amount of damage that’s been done to the economy, the banking system and the markets will take a long time (through the remainder of the year) to repair.

In an earlier post, the Bear Market Context, I enumerated the depth of previous declines where the MTI (the S&P Index and corresponding moving averages) was in this alignment and the picture isn’t pretty. My assessment of the situation, I’m preparing for another 25-30% decline from current levels to the ultimate bottom. I hope I’m wrong but I’m preparing for the worst. I don’t know what events are going to fuel the drop but foreign markets, after leading the way up, may now be leading the way down.

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