The MTA Education seminar kicked off on May 18th with a Market Forecast Panel at the Bloomberg World Headquarters in New York.
The moderator was Vincent Catalano. Panelists were Gail Dudack, Michael Kahn, John Kosar, and Louise Yamada.
Vincent Catalano, CFA, is president and founder of iViewResearch, a research and consulting firm, and Get Smart Quick, a contract research company. Mr. Catalano is a past president of the New York Society of Security Analysts (NYSSA) and served as a board member from 1991 to 2005.
Gail Dudack, CMT is co-partner of Dudack Research Group LLC (DRG), an investment research firm that provides economic, fundamental, quantitative and technical strategy and tools for institutional money managers. Prior to DRG, Ms. Dudack was the Managing Director of Research and the Chief Investment Strategist for SunGard Institutional Brokerage Inc. Earlier, she was the Chief U.S. Investment Strategist for UBS AG as well as its predecessor S.G. Warburg PLC.
Michael Kahn writes the twice-weekly “Getting Technical” column for Barron’s Online (www.barrons.com), and the daily “Quick Takes Pro” technical newsletter (www.MidnightTrader. com). Mr. Kahn is the author of two books on technical analysis, most recently Technical Analysis: Plain and Simple, is a frequent contributor to SFO Magazine and was chief technical analyst for BridgeNews.
John Kosar, CMT is the Director of Research at Asbury Research LLC, which provides financial research to investment professionals. John has been in the financial business since 1980, and spent the first half of his career on the trading floors of the Chicago Mercantile Exchange and Chicago Board of Trade. Prior to founding Asbury Research, John was Senior Research Analyst for Bianco Research.
Louise Yamada, CMT, formed Louise Yamada Technical Research Advisors, LLC with Ron Daino after 24 years at Smith Barney (Citigroup). Ms. Yamada was Managing Director and Head of Technical Research for Smith Barney. She is a perennial leader in the Institutional Investor poll, and was the top-ranked market technician in 2001, 2002, 2003 and 2004.
Question: What is the state of the market?
Yamada: The market has started a corrective trend. It is due for a rest. She expects a new low but not lower than the 2002 low. Metals, materials, and industrials are in a bull market driven by international expansions, similar to the U.S. expansion in the early 1940’s.
Dudack: Reporters say this sell-off is due to the CPI data but she doesn’t believe it. She thinks it is related to a liquidity crisis somewhere in the world, similar to the October 2005 rapid drop caused by Refco. It could be the “fast money” that had moved into hedge funds, international markets, and commodities unwinding positions. Last Friday (May 12) everything went down, indicating that people were moving into cash. Someone big is selling.
She thinks this is a good buying opportunity, that the fundamentals are still strong. She quoted someone at Merrill Lynch saying this should be a fast correction on the way to 12,400: 12,600 on the Dow. Leadership will be in industrial and health-related sectors, which will grow faster over the next decade.
Kosar: He expects a 10-12% correction. When the Nasdaq is under-performing the S&P 500, as it is now, it is bad news and it has been seen in several structural breakdowns. Lots of things are at their 200-day moving averages now, so the markets are at a critical juncture. VIX has recently spiked up, so he expects to see a recovery in late Q4.
Yamada: DELL, MSFT, INTC are weak but they are becoming old tech. Many of the new tech sectors are doing fine. Money is moving out of old tech into new tech.
Kahn: Things are not looking good. He doesn’t want to be in stocks now. Stocks will be a lot lower in six months. Gold is too high, should drop back to 550-600 range, where it would be a good buy since the long-term trend is up.
Kosar: Long-term rates have broken a well established down trendline and are headed up, after a rally in bonds over the next few months.
Dudack: The rapid decline of the dollar followed an international economic summit meeting and could have been part of some plan. She is long-term bullish on the dollar and sees a 30% gain vs. the Euro. Technically, she sees a head and shoulders bottom. But the dollar could remain weak vs. the Asian currencies.
Long-term rates may come down some now, but the long-term trend is up. Rates have been artificially low for several years. One cause was the 2003 tax package, which required pension funds to match durations of holding vs. durations of obligations. This increased demand for long bonds. 30 & 50 year bonds are very popular. Real returns on bonds, after inflation, should be 2%. They have been well below that.
Yamada: International markets are now like the U.S. in the early 1940s, driven by growth. U.S. markets are under-performing international markets. This is bad for the dollar. She sees the dollar at a long-term support level of 80 and expects that it will go lower. She thinks the dollar may be losing its place as the world’s reserve currency for a couple of reasons, “Lots of people now hate us as a result of our policies. We have become an economy driven by consumption and government spending.”
Traditionally, economies driven by growth, like China currently, tend to have stronger currencies. Economies driven by consumption and government spending have tended to have weaker currencies. As an example, she pointed to England early in the last century.
Question: What do you love and hate now?
Dudack: Loves stocks with increasing dividends over the last ten years, low PE ratios, and 3.5% yields. Hates commodities short-term.
Kosar: Loves the long bond, utility stocks, and financials after a short pause. Hates commodities, tech, CRB, speculative bubbles.
Yamada: Loves cash in foreign currencies like the Canadian dollar. Loves materials and gold after a pullback. Hates bonds and the dollar.
Kahn: Loves bonds for a while. Sees consumer stocks faltering, while industrials will be strong.
Question: When do you think we will see the bottom?
Kahn: About the end of the year when we see the breadth improving.
Yamada: After we see a new low, then a test of that low to confirm the uptrend.
Kosar: When sentiment is more bearish and techs start out-performing again.
Dudack: When we see another 90% down day (of stocks) then a 90% up day.
Summary comments:
Dudack: The Nasdaq has changed: now too much hot money in QQQQs. The importance of the Nasdaq was a 90’s view. Tech is under-performing this year because they have to start expensing options. This depresses earnings. So money flow is out of tech now.
The dollar is too low. Europeans came here last Christmas to do their Christmas shopping. New York is flooded with foreign tourists.
Yamada: The market is now very stock-specific. Look at the major trends and enter on pullbacks. Gold and oil are in a structural bull market (after a pullback). Bonds and commodities are in a trend reversal. Midcap was strong, may be less so going forward. The dollar is breaking down.
Dudack: Use technical analysis in a broader perspective. Ask who has the money and what do they own. Recently hedge funds have had the money and it tends to be hot money, moving around rapidly. With ETFs and all the derivatives, the market has changed. Look at price and volume. Look at sentiment indicators (she likes the AAII sentiment indicator). She thinks tracking the assets in Rydex funds (suggested by Kosar) is a good idea.