Saturday, August 20, 2011

Recession Bottoms

by Richard Crews
Yogi Berra said, "It's tough to make predictions, especially about the future."

But Lord knows lots of people try hard to make predictions about the economy in general and the markets in particular (like stock or commodity markets, real estate markets, import and export markets, etc.). There's a lot of money in it.

There are two general approaches to making such predictions. One is called "fundamental analysis"; the other is called "technical analysis."

Fundamental analysis depends on looking hard into the factors that cause the changes--unemployment, consumer confidence, the money supply, the credentials and track records of the people making key decisions, etc. This seems like a good approach. The trouble is that there are always a lot of factors and no one knows for sure which ones have the greatest weight. There are always enough reasons to explain anything. If the stock market goes up, fundamental analysts say that was because of reason A and reason B; if it goes down, that was because of reasons C and D; if it stays the same, or goes up and then down, or down and then up . . . there are always good reasons to fit the result.

Technical analysts say, never mind the reasons--there are always plenty of good reasons to go around--just look at the pattern of changes. They point out that certain patterns in the fluctuations of prices occur again and again--in different markets, for different reasons, but similar patterns. So they draw graphs ("charts") of prices vs. time, and talk about patterns like "head-and-shoulders," "flags," "support and resistance levels," and so on.

Fundamental analysis gets a lot of respect--after all, it makes so much sense, and the reasons it puts forward seem correct (in retrospect). Technical analysis, on the other hand, is too esoteric and complicated; it depends on studying and recognizing patterns that most people have no idea about. It doesn't make simple sense like fundamental analysis.

Perhaps that is why one hears a lot of "fundamental" reasons these days for the stock market's gyrations and the ups and downs of economic indicators, but one doesn't hear much that--"Say, folks, this is what a technical bottom looks like: lots of violent gyrations, no clear direction; these markets are just 'building a bottom.' The future is up."

Of course technical analysis is not always right. But there are some things that it is surer about than others. And this is one that looks very strong and clear. This turmoil we're seeing right now is to be expected as the recession bottoms.