There are many different ways to analyze the markets; Fundamental and technical analysis are two of the most popular. Evaluating the likely future path of business earnings and studying price patterns and momentum are certainly worthwhile, if not crucial, to successful investing. Fundamentals tell a story about business cycle trends, and technicals tell you how investors react to hearing that story. Each, then, is most useful when seen in the context of the other.
In terms of fundamentals, history suggests that the rapid increases in the dollar, interest rates and oil prices over the past two years represent a uniquely bearish trifecta that will likely have a very negative effect on earnings over the next year . Long-term techniques, especially momentum, seem to confirm this analysis. And bearish fundamentals combined with bearish technicals can simply be an effective way to define a bear market (at least better than the arbitrary 20% rule).
Given that we are now in a bear market (however you choose to define it), history suggests that we are only halfway through the process. The previous declines fueled by the bearish trifecta mentioned above were longer and more significant in terms of price declines than what we have seen in the stock market thus far. Of course, history doesn’t repeat itself but it often rhymes; so while the current bear market is unlikely to follow the pattern perfectly, the analog price on the chart above can be as good a map to the path you’ll find.
See also CS, GS and BofA, all of whom believe stocks do not fully reflect the challenges facing the US economy
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