Wednesday, March 25, 2009

Better Business Climate Not Far Off

A better climate for business is not far of according to Jean Temkin, author of More Charting for Profit and business writer for the Business Day news paper. With the current economic slowdown evident when ever you open your favourite newspaper or news bulletin, its great to hear some optimism from the Business Day journalist. With the recent rate cuts and further cuts being predicted in April, life for small business owners is about to get easier albeit slowly but surely.

The article by Temkin added for your convenience below:

BUSINESSES that are hanging on by their toes as they contemplate shutting up shop ask how long our economic plight will last. If it is a matter of months, their toes may be able to take the strain, but if it is longer they may as well cut their losses now.

Bearing in mind that the current crisis is the worst for many decades, I’ve dug into history books, read what the pundits are saying and analysed many charts. My conclusion is that the end is far too indistinct to even guess at. But barring further financial upheavals and providing kismet rewards our belt-tightening efforts, it’s possible we may already have seen the worst. As for toe-holding businesses, if possible they should hang on a little longer.

It is only my shorter term charts that look more positive than of late. Longer term charts are indecisive. The JSE overall index has put on 16% since its November low which has already led to some pundits speculating that we have seen the market’s bottom. Finance Minister Trevor Manuel has confirmed that, unlike the banks of our trading partners, South African banks are sound. This being so, we perhaps have a better chance of an earlier recovery.

I have chosen a 20-year chart to show that while the Dow does have some influence on the Overall, they are not necessarily joined at the hip. The Overall is looking reasonably positive while the Dow does not.

Going back as far as my data allows, I have added to the percentage fall to each significant downward correction. Using figures that represent working days, the first figure shows how long it took to reach the bottom of a dip, and the second figure how may days it took to regain its previous high. As it is an arithmetic chart, earlier corrections appear less significant than later corrections but in percentage terms are often more significant. We are now 263 days into the current dip and the loss from the May high to the market bottom on November 20 was 196 days.

The Dow’s crash began eight months before the start of the Overall’s crash. From October 2007, the Dow’s most recent high, until November 2008 the Dow lost 46%. The Overall’s most recent high was on May 23 last year and by November it had lost 43%. Both did an up-flip in November. The Overall rose, retreated slightly and then rose again. The Dow rose, fell back and continued falling. Since the up-flip the Dow has lost 6% against our 16% rise.

While the monthly 20-year chart shows the Dow Jones still heading down, its daily charts show it trawling along the bottom and still in oversold territory on its overbought/oversold chart. The Dow’s moving average convergence divergence (MACD) plotting is nudging down through its moving average. The monthly chart shows the Overall nudging better, and its daily charts show it at the zero level on its overbought/oversold chart and nudging upwards through its MACD.

Paging back 78-years to the 1929 Wall Street crash, I see that the Dow lost 90% in total, reaching its low two years and three months later, in July 1932. Eight months after that, on March 15 1933, the Dow experienced its largest percentage gain in one day with a leap of 15,34%. The world was still deep in the Great Depression but the Dow was signaling that the worst was over. It continued upwards but working with inflation adjusted figures the 1929 high was not surpassed until 1954.

•Temkin is the author of More Charting for Profit, a textbook on technical analysis.


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