Market Strategy November 04/04
by Victor Hugo
November 04/04
POST- US ELECTION
So what was that election all about? Is everyone a victim of media that
wanted an ingratiating, grinning Democrat -- who promised to try to please
the world? The media hardly seemed to get it right about what the voters
wanted.
I even had a streetwise multi-national businessman challenge me a day
before the election, to a bet of 100 Kruger Rands, that Kerry would win.
I said the US$ was saying Bush would win. Didn't take the bet - too small!
- and not a fair one -- when I have such a clear crystal ball as the US$.
Then I heard of any number of traders who didn't want to trade in the
month before the election. They thought the election process was driving
the market. Sure, election issues have affected sentiment, but the bigger
issue remains: US growth prospects can only become more credible and Wall
Street can only do well and the US$ will only make a long-term base --
when the US commits loudly and unequivocally to fixing its trade deficit
and its debt problems. Currency traders, often a well-informed crowd --
considered Bush less likely than Kerry to start the belt- tightening process.
Oil shortages remain. More money leaves the US. So the US$ has weakened
more in the last few days.
No US President can commit to substantially higher interest rates and
other belt tightening, without upsetting the whole vulnerable edifice.
An edifice that depends more and more on the US consumer and his credit
card. A consumer who needs interest rates not to go up at all -- or only
very small and very slowly.
So what now? Is Wall Street shrugging off problems again? Have a look
at the Dow Jones Industrial Index. A series of falling tops corroborating
since January 2000 and since February 2004. A DJIA looking pretty apprehensive
in the vicinity of increasingly feeble technical support ranges.
Isn't the usual end- of- year global stock market strength coming now
that the election is out of the way? Or is the market going to remember
what the hundreds of CNBC commentators have said about company earnings
falling in 2005 and that markets will come down after the election? No-one
has the answer, but everyone has to take a view. No wonder the markets
are standing virtually still.
This could be a phase in which earnings analysts get the loudest audience
for a while. Any signs of earnings weakness or strength next year -- could
be the persuader for those daily buy/hold /sell decisions. Markets are
in the critical window of decision time - whether to pursue the typical
year-end bull or whether to pocket their 2004 (mainly stockpicking) gains
-- and go defensive, looking for the next buying dip or a "nice"
sell-off. Technical breaks could also attract greater reaction now, during
this sensitive phase.
My guess is that there is a lot of apprehension out there -- now that
the election outcome is not delayed. Actual market prospects are being
thought about - instead of the rosy hype. Too many expect only upside.
A clue came a few days ago from an experienced institutional investor.
He told me there isn't going to be a crash this year. Well the odds must
be good he is right. Yet he admitted that it would not take much fundamentally
or technically to make him ( and others) defensive as their priorities
lean toward protecting 2004's gains.
And where is the bull market that the Sunday Times predicted a few weeks
ago?
Talking about the US$ - have you noticed the Oil and Gold price? $Gold
trading at $432.20 as I dictate this.
JSE Gold shares have come back in the last few days as the Rand strengthens.
If the Rand heads below the much watched 6.0225 for a day or two, golds
could stay under pressure for a while, even though the $Gold price is
strong. Momentum and behavioural swing counts suggest that the $Gold price
while it holds above $419, may be heading to $449 or $464 soon. A break
of $432 for more than a day could send gold ballistic -- and help repair
those JSE Gold share dips of recent weeks. A GOLD$ZAR price below R2590
would be concerning for the short term. Consolidation above R2665 would
reduce technical downside for JSE gold shares. Now at R2627. The trader
can buy, preferring the down days, using a tight exit strategy.
For the next three months, JSE investors can consider preferring sectors
that will do well with a stronger Rand and can consider reducing resources
and exporters who are pressured by the prospects of the Rand working stronger
e.g. towards $ZAR 5.80 resistance between now and end of year. Perhaps
even stronger than this if the US$ falls out of bed.
In US$ Index terms, technicals paint a picture of the US$ perhaps surprising
the world with a 11% selloff in coming months. The Rand to $ZAR 5.40 next
year would be quite feasible on this scenario.
If Wall Street also spooks the markets, a good lot of those nice- looking
JSE gains this year will evaporate. A defensive approach and building
a portfolio that is resilient to market shocks can still pay off handsomely.
The next few days will again be very important as financial strategy meetings
all over the world start leaving footprints through prices.
Best regards,
Victor Hugo
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