Annual Forecast Model – Mid Year Update (July 4, 2002)

Happy Fourth of July!

Excerpting from my February 4 commentary:

1. “It is clear that the bull market has not yet arrived. The AFM has suggests that we may see a rally phase in February or March and perhaps another one in April (which may be nothing more than short-sale opportunities) and then down we go! The sell-off apparently carries in summer and then we experience a recovery into October or November followed by BOTH a sharp year-end sell-off AND recovery. Wild! Take your dramamine with you!”
2. “The AFM portrays the market going through some steady deterioration in the months ahead. If you’re going to be a buyer of stocks, it appears summer is the time to be looking (June/July), but you also don’t want to hang around. If you’re waiting for a bull market year, you shouldn’t be in any rush to buy stocks in 2002 at all, that’s for sure.”
3. “My strategy is to try and play the rallies but mostly try to position on the short side for a potentially long and tiring battle with the bears.”

What else can I say, but Whoopee! The Annual Forecast Model at least, so far, has done a miraculous job in doing what NO NOTABLE WALL STREET FIRM OR ANALYST has done, i.e, call for the continuation of the bear market! With a strong institutional following of this Model and growing retail interest, please be advised that next year’s price will again go up substantially in my attempt to keep it out of the reach of too many! In addition, since I am considering adding Managed Accounts to my list of services and I will understandably be greatly influenced by the projections in the Annual Forecast Model, controlling the circulation of this research will become progressively more important.

Has anything changed since the beginning of the year? The answer is no! The AFM remains unchanged in its forecast.

The problem is trying to decipher the balance of the year. It was clear that a peak was due in March or April and, as forecast, the market could take a nasty slide afterwards, but with the pattern from here to yearend less clearcut, i.e., a big up or a big down, we’re going to have not only take out our magnifying glasses but we’re going to have to watch sentiment and other technical indicators very closely.

It appears we are fast approaching a point where we could experience a technical bounce, the ideal date being set for a low is July 10. But, taking the AFM literally, the bounce is minimal and we continue to work lower or at best go sideways until late August to mid September. Again, taking the AFM literally, we then begin a recovery that carries into potentially early November, but THEN watch out below. According the AFM, there is nasty turn of events in November. Could it be a terrorist attack or another financial catastrophe? Does an asteroid pass close to the earth as was recently reported or does a huge solar explosion like the one that occurred and was documented last week have a impact on the earth in ways we can only speculate? I don’t say these things jokingly. With a huge forest fire here in Arizona and one in Colorado and floods in Texas, the impact of Mother Nature can be far more devastasting that crazy Islamic terrorists.

What have we learned this year about economics and fundamental analytics? We have learned what I’ve known for nearly 30 years – they are useless! Numbers have been questionable as long as financial markets have existed, even from the government itself! The power of suggestion is very great on Wall Street and independence of thought is not. A few high paid analysts state their beliefs and like lemmings everyone else follows. The truth is that manipulative forces have long been at work ever since trading began under that old Buttonwood tree in the late 1700s. What is the best way of unloading huges quantities of shares? Simple. Put out the story that the economy has bottomed and stocks are going up, especially high-tech stocks! I suspect most of the those spouting off don’t even know they are being duped. Elsewhere, we do have outright criminals – those that ‘cook the books’. It is the human folly of avarice that causes small individuals with big egos to commit these kind of crimes. But, there is also the endemic problem that these individuals are being intimidated by their shareholders and Wall Street investment bankers to perform. The system fundamentally stinks. Grow your earnings by leaps and bounds each year or traders kill your stock. Traders kill your stock and your stock options and warrants become worthless. The SEC is run by former Wall Streeters or their pawns and deals are done for the sake of the deal and not necessarily for the benefit of the company or the shareholder. I fear the worst is yet to come! We have only seen the tip of the iceberg. I cannot sit here and forecast 2003 for you as yet, but as Warren Buffet has cautioned us, we may have entered a multi-year or even decade period of rough sledding. If a significant bear market rally unfolds (some would call it a cyclical bull market within the context of the bigger picture secular bear market that began late 1999, early 2000), I hope the AFM provides us with ample warning. The most optimistic forecast I can made today is that PERHAPS a big low in November sets the stage for a huge year-end rally that carries into next year!

Despite my above comments, I have learned to play the game! They steal bases in baseball don’t they? We just have to follow ‘the boys’ and try to profit and the best way to do that is watch the AFM, our technical indicators, other cyclical indicators – while mixing in a strong dose of skepticism and cynicism about what we hear and read.

I know it sounds trite and I’ve used this expression before but regardless of what the financial markets do, the sun still rises in the morning and birds continue to sing. It is afterall, only money.

G-d willing – See you in 2003!

Annual Forecast Model

Disappointing – But Another Volatile Year Lays Ahead

In mid-January, I broke from tradition established back in the early 1980s and provided subscribers with an early ‘glimpse’ of how 2002 was beginning to shape up. Now that my work has been completed, the entire Annual Forecast Model (AFM) is presented below for your observation and study. In my opinion, you have in your hands one of the most unique and powerful stock market investment/trading tools in existence. Since you’ve already paid for it, you know that this is not sale hype, it is fact. While no indicator is perfect, especially the AFM, its uncanny record in calling significant turning points and overall trend for the stock market is, in my experienece, unparalleled.

Developed back in the early 1980s, the AFM is based on a proprietary formula. As you know, it has been an ongoing concern of mine that if too many people see or use the AFM, we could start seeing diminishing returns. On occasion during my interviews on PBS’ The Nightly Business Report, certain sections of the AFM have been displayed – a practice I am trying to curtail. Please make a note to yourself. You have paid to see a tool (indicator) that could be of great benefit. Despite its obvious value, you may feel compelled to share this model with others and I strongly urge you to keep it confidential less we all lose the benefit among ourselves from overexposure.

For those of you new to the AFM’s construction and guidlines, let me lay some ground rules. First, the AFM’s construction is fairly simple. The vertical axis denotes direction and the horizontal axis denotes time. A chart zig-zagging lower is a bear market pattern, but a chart zig-zagging higher is a bull market pattern. Secondly, please note the AFM does NOT attempt to predict amplitude, but only predicts direction! In other words, the attempt is made to forecast the TIME when high adn low points in the stock market may occur. Peaks and troughs can be at any level. It basically comes down to a question of relativity. In other words, even though the chart may show a high point or a low point, there is no specific numerical value associated with that point, i.e., Dow Industrials 10,000 or 8,000. The AFM formula simply does not generate such values. In addition, new relative highs or lows in the AFM does not necessarily suggest higher market highs or lower market lows. These points could turn out to be relative highs or lows and nothing more. Thirdly, the AFM is presented in good faith as a general guide for the future. Though I make no modifications during the course of the year, I am always paying close attention to other techncial, cyclical and sentiment indicators to help ‘fine tune’ what is unfolding in the marketplace. The dates presented may or may now turn out to be accurate representations of high or low points in the market. There have been occasions when a date is coincident (a bullseye) with a market peak or trough. More frequently, however, the actual market peak or trough is skewed either side of the predicted date. What we are looking for is the GENERAL PATTERN of the AFM in any given period. Is the pattern bullish or bearish, is the pattern rising or falling dramatically or modestly? The bearish pattern displayed in the 2000 AFM when it was published February 1, 2000 certainly presented clear warning of what may lay ahead. The low point predicted for the end of March, 2001 dramatically presented the power of the AFM to predict an excellent near-term buying opportunity. I am not going to survey all the accurate or inaccurate calls made by the AFM at this time. Please refer to previous reports for that historical perspective.

So, what does the AFM (or should I say, AFMs) fortell for 2002? The AFMs are presented below for the Dow Industrials, the S&P 500 and for the Nasdaq Composite. As the expression goes, “A picture is worth a 1000 words”. Despite a plethora of optimistic forecasts for the year ahead based in large part on the advent of an economic recovery orchestrated by Alan Greenspan, it is clear that the bull market has not yet arrived. The AFM has suggests that we may see a rally phase in February or March and perhaps another one in April (which may be nothing more than short-sale opportunities) and then down we go! The sell-off apparently carries in summer and then we experience a recovery into October or November followed by BOTH a sharp year-end sell-off AND recovery. Wild! Take your dramamine with you! So far, we know early strength was limited to the first few days of January and the question arises is the AFM out of sync? Too early to tell is my response, but the key is wait and see if OTHER technical indicators support a rally. If they do, you now have confirmation.

It is obvious the bulls are going to be awfully frustrated if the AFM is on target. Remember, it’s the overall pattern, not the exact dates! The AFM portrays the market going through some steady deterioration in the months ahead. If you’re going to be a buyer of stocks, it appears summer is the time to be looking (June/July), but you also don’t want to hang around. If you’re waiting for a bull market year, you shouldn’t be in any rush to buy stocks in 2002 at all, that’s for sure. If you hope to trade the market, then combine the AFM with other indicators (including sentiment) and make your move! Another word of caution. The AFM clearly gives the impression that we are going lower and lower as the year unfolds. Assuming the current state of the economy both here and abroad (especially Japan) not to mention the War on Terrorism, it is logical to believe the AFM could be correct. But, this may not be the case. The AFM attempts to predict direction not amplitude, even though there are some pretty good correlations in this regard, e.g., October, 1987 and March 2001. In other words we may trend down, but not necessarily to new lows or we may rally but not necessarily to new relative highs such as depicted in the August-October period. My strategy is to try and play the rallies but mostly try to position on the short side for a potentially long and tiring battle with the bears.

During the course of the year the graphs below will be updated with the ‘Actual’ results under the prediction. I will also attempt to update the above commentary along the way. But, ultimately, the AFM is right or its not! Expect periods that it is out of sync and expect periods that it is right on the money. But, one thing is for sure. If 2002 turns out to be a rip roaring bull market, the AFM may need to be retired, possibly for good!

Mark Leibovit
February 5, 2002