Hai all , posted below is an extract from this web page
http://www.elliottwave.com/features/default.aspx?cat=emw&aid=2427&time=pm
Are You Buying When Markets Dip?
5/30/2006 1:13:24 PM
They dont just say Sell in May and go away for nothing. May is never the friendliest time for stocks but in 2006, its been a particularly mean month. Europes major bourses shed 10% or more across the board and you if you think thats a lot, consider how investors in Europe's smaller markets (like Russia) must feel, whose RTS index lost 26.9% since May 10!
But even after the declines, Europes gains this year are still on track to meet or even beat the standard 10% annual return chased by your average mutual fund. Add to that the rock-solid growth numbers European stocks posted over the past three years, and youve got some really impressive performance, May declines notwithstanding.
Besides, in all fairness, these declines werent completely unexpected. Many European analysts went on record calling for a 10% correction sooner rather than later. And how could you not? In any market, there will be some valleys between the peaks. Hiccups along the way are to be expected like the 600-plus point plunge the British FTSE 100 took in May. European indexes havent had a decent correction in over three years, so the May hiccup could be just that.
Its this normalcy to the May declines that makes it tempting to call them just a correction. And then go ahead and load up on cheap European stocks. After all, if its just a dip in a bull market, it could be a perfect moment to beef up the old portfolio. In the good old bull market days of the late 1990s, for example, buying the dips was a very popular investment strategy. It worked like a charm back then, because every dip was followed by another rally to a new high. That is, until the larger trend reversed in December 1999.
During the December 1999-March 2003 bear market, buying the dips was suicidal because every counter-trend rally was followed by a new, deeper decline. Since March 2003, however, every dip has again been followed by a stronger bounce, and buying the dips is back in favor. But given the maturity of Europes bull market three solid years a wise question is, how much steam does it have left in it?
That depends on whom you listen to, but heres what Elliott wave patterns say. On May 17, most European bourses suffered 3%+ declines in a single day. The FTSE 100 fell 2.92%. Notice in the chart below that the form of its decline shows an unmistakable five-wave drop a telling sign for any experienced Elliottician:
Notice also that the FTSE has a long history of making an early exit in front of major meltdowns. At the end of the bull market in 2000, for instance, the FTSE exited the scene 15 days ahead of the Dow, which started its bear market on December 30, 2000. This time the FTSE diverged lower on April 21, 19 days ahead of the Dow.
Only time will tell if the FTSE is again leading global stocks into a major decline. But as Tom Denham, editor of our European Financial Forecast Service, puts it: The current juncture is a difficult one. Buying European stocks now would be a little like trying to catch a falling knife. You might succeed, but there is a good chance of being cut.
How do you avoid getting cut? Know what the larger trend is. Buying the dips is a valid strategy, but it only works if youve timed the larger trend correctly. Timing, once again, is everything
http://www.elliottwave.com/features/default.aspx?cat=emw&aid=2427&time=pm
Are You Buying When Markets Dip?
5/30/2006 1:13:24 PM
They dont just say Sell in May and go away for nothing. May is never the friendliest time for stocks but in 2006, its been a particularly mean month. Europes major bourses shed 10% or more across the board and you if you think thats a lot, consider how investors in Europe's smaller markets (like Russia) must feel, whose RTS index lost 26.9% since May 10!
But even after the declines, Europes gains this year are still on track to meet or even beat the standard 10% annual return chased by your average mutual fund. Add to that the rock-solid growth numbers European stocks posted over the past three years, and youve got some really impressive performance, May declines notwithstanding.
Besides, in all fairness, these declines werent completely unexpected. Many European analysts went on record calling for a 10% correction sooner rather than later. And how could you not? In any market, there will be some valleys between the peaks. Hiccups along the way are to be expected like the 600-plus point plunge the British FTSE 100 took in May. European indexes havent had a decent correction in over three years, so the May hiccup could be just that.
Its this normalcy to the May declines that makes it tempting to call them just a correction. And then go ahead and load up on cheap European stocks. After all, if its just a dip in a bull market, it could be a perfect moment to beef up the old portfolio. In the good old bull market days of the late 1990s, for example, buying the dips was a very popular investment strategy. It worked like a charm back then, because every dip was followed by another rally to a new high. That is, until the larger trend reversed in December 1999.
During the December 1999-March 2003 bear market, buying the dips was suicidal because every counter-trend rally was followed by a new, deeper decline. Since March 2003, however, every dip has again been followed by a stronger bounce, and buying the dips is back in favor. But given the maturity of Europes bull market three solid years a wise question is, how much steam does it have left in it?
That depends on whom you listen to, but heres what Elliott wave patterns say. On May 17, most European bourses suffered 3%+ declines in a single day. The FTSE 100 fell 2.92%. Notice in the chart below that the form of its decline shows an unmistakable five-wave drop a telling sign for any experienced Elliottician:
Notice also that the FTSE has a long history of making an early exit in front of major meltdowns. At the end of the bull market in 2000, for instance, the FTSE exited the scene 15 days ahead of the Dow, which started its bear market on December 30, 2000. This time the FTSE diverged lower on April 21, 19 days ahead of the Dow.
Only time will tell if the FTSE is again leading global stocks into a major decline. But as Tom Denham, editor of our European Financial Forecast Service, puts it: The current juncture is a difficult one. Buying European stocks now would be a little like trying to catch a falling knife. You might succeed, but there is a good chance of being cut.
How do you avoid getting cut? Know what the larger trend is. Buying the dips is a valid strategy, but it only works if youve timed the larger trend correctly. Timing, once again, is everything