When will we see the next window of opportunity for stock markets? - Frequent visitors to this site know my view. Wall Street is in a secular bear market, defined here as a generation of mostly contracting price/earnings ratios and rising yields.

For the record, secular bear trends have generally and logically followed long-term bull trends for major stock markets, and vice versa. Consider Japanese stocks after the bubble peak in 1989, and US equities from the late-1960s until the early-1980s.

Wall Street’s current secular bear trend commenced in March 2000. I maintain that it won’t end, defined here as a trough in p/e ratios and high in yields, until around 2020, give or take two or three years.

I also maintain that we will see many US big-cap stocks trade at single figure p/e ratios and yield at least 5 percent before the next secular bull trend commences. These valuations will be achieved in three ways - GDP growth, lower expectations by investors, often leading to lower stock prices.

There is no need for hand wringing during secular bear markets, although we will see plenty of it. Similarly, investors need not cash up and abandon stock markets, although a number will eventually do so.

However, investment success will require a change in tactics from the last bull market, when buy-and-hold and indexed funds became the raging fashion. During the last few years, and probably for the next fifteen, medium-term trend running will be a more effective strategy. And long/short funds should generally outperform long only funds, subject to management skills.

Timing is even more crucial to investment success during secular bear markets. If there is a better way to address the challenge of market timing than behavioural and factual (rather than theoretical) technical analysis, I haven’t heard of it.

We need to know when to buy and sell, which means paying close attention to Wall Street due to its influence on most other stock markets. We also need to know which markets to buy and sell, since performance will vary considerably. Just because the S&P 500 Index is unlikely to move significantly above its 2000 high for the next decade or more, does not mean that share indices in some other countries will not do so, as we have already seen.

OK, David, I’m with you so far, but what about that next window of opportunity for stock markets?

You are probably aware that September has often been an inauspicious month for stock markets. However most firmed notably during the second half of August following a clear, albeit not seminal, increase in bearish sentiment.

Those rallies created a number of short-term overbought conditions, so we are likely to see some further consolidation of recent gains, particularly on Wall Street and among the European share indices. Nevertheless, if the August lows are not breached significantly during this pause, and this is obviously a greater risk in a secular bear rather than bull market, sentiment might well improve commencing in the second half of October.

If we are to see a playable medium-term rally for stock markets anytime soon, which I rate at slightly better than a 50/50 possibility, I believe this window of opportunity is most likely to open in 4Q 2004 and carry well into 1Q 2005.

I’m content to watch for the time being, focussing on those August lows, the price of crude oil, government bond yields and President Bush’s poll ratings.

Of these wild cards, I believe oil remains the most important and it’s bouncing from initial support today, as you can see from this daily chart. Too strong oil would weigh on stock markets once again. Bond prices are in part discounting a weaker picture for GDP growth, so this uptrend needs to falter if Wall Street is to firm meaningfully. The prospect of Bush’s re-election in November would be a bullish influence, as I mentioned and illustrated again yesterday.

A firmer Wall Street in 4Q 2004 and 1Q 2005 would launch considerably better rallies in a number of mostly emerging markets. Here are some of the II Global charts for Asia, in no specific order, which I will briefly discuss on tonight’s Audio.

Thailand (monthly & weekly), India (monthly & weekly), Indonesia (monthly & weekly), Malaysia (monthly & weekly), Hong Kong (monthly & weekly), Taiwan (monthly & weekly), Japan 2nd Section (monthly & weekly) and Australia (monthly & weekly). Please note: these charts are best viewed on line, because of the up and down month/week colours, which are all but indistinguishable when the graphs are printed out.

I’ll continue this review of mostly emerging markets in the next few days.

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