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What Will Tomorrow Bring

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By Martin A. Armstrong

© Copyright November 18, 1999

There is little doubt that the world seems on the brink of dazzling new highs or the depth of despair. The US market has proven to be more than just resilient, it has become the bug light of global economic prosperity. Unquestionably, the lure of the Internet has presented perhaps the dawn of a new economic revolution within which history is repeating itself once again. During industrial, automobile, space age and computer revolutions, technology sprung from the heartland of America leaving the rest of the world plying catch-up. For numerous reasons, mostly taxation and regulation, Europe remains held captive within the grip of its own bureaucracy that continues to prevent free access and global standardization in telecommunications. These barriers are dominant factors behind insuring that economic growth on the back of this new age of economic revolution will remain very much an American success story. Nevertheless, for as dismal as the European prospects may be (UK excluded), Asia appears to be the second brightest spot for keeping pace with technology.

While the fundamental backdrop to this bull market would seem to be a one-way street, we must consider the fact that no market trend with such a strong momentum remains correction proof forever. It is simply not possible for this bull market to surge higher month after month without a serious correction to flush out the weak players. The real question is dominated by the potential to establish a high in 2000 followed by a low into 2002-2003 or do we see a sharp correction from a November 1999 high into a May 2000 low followed by a rally into 2003?

This bull market has also been most impressive from the UK perspective. With the single exception of 1980, every single year has held the previous year’s low since 1974. This is one of the most incredible bull runs in the history of any market. Next year will be the 26th trading interval from the 1974 low. Besides our composite cyclical models that warn of a 2000 event, the odds of continuing to make new highs beyond 2000 without some sort of a correction are not very high at all. Something seems to statistically support a potential high by next year.

From Japan, the majority desperately wants to believe that the worst is over. This is perhaps natural since it has been 10 years since the bubble top. Unfortunately, our model was very specific. Unless a new low materialized in 1999, then the risk of extending the bear market into 2002 would remain very much a dominant possibility. At this point in time, the Nikkei absolutely MUST achieve an annual closing ABOVE 21,281 before it is safe to say that the low is in place. If this market unfolds as would be expected, then any turn downward in the United States or Europe will take the Nikkei with it into new lows for 2002. In fact, this market must close at least ABOVE 17,019 in order to remain in a position to rally further into 2000 before turning back down.

The German share market basis the DAX was one of the few markets in the world that reached a peak in 1986 rather than 1987. This market has historically been shifted one year ahead of the global economic correlation basket. As a result, watching the DAX is very important. For if the DAX fails to exceed its July 20th, 1998 high by May of 2000, then this could be a significant leading indicator warning that a 2000 high would still produce a serious correction into 2002-2003.

Gold is also a key market to watch as to discerning the future that lies ahead. Our short-term out looked warned that the seasonal pattern for gold was an early summer low followed by a rally into an October high. That forecast has proven to be correct. Of course thanks to a lot of false information about shorts and conspiracies, a panic rally to the upside unfolded. To set the record straight, neither the company, any public fund, Japanese client or myself had any short positions in this market. The CFTC never made any such announcement about gold positions. Reports by such individuals on the Internet were simply made up like so many other things GATA reports. It is unfortunate that some Goldbugs cannot see gold in a global context preferring to view shadow conspiracies lurking around every corner. Just because our models have been bullish on stocks and bearish on gold for many years does not necessitate us being short 700 tons. Of course, such accusations come from people who are perpetually bullish and do not know how to be objective since they themselves always forecast based upon their own personal positions and assumes that everyone else does the same. These people may have helped to scare the gold mines out of their hedge positions, but nobody is really interested in gold right now to form an elite core of buyers. Once the hedgers were scared out, the buying dried up because unless the global timing is right, you cannot make a bull market out of a bear market no matter how loud you scream. Nevertheless, the potential for gold to return to a bull market is very much linked to the fate of the balance of the financial world on a clear correlated and objective basis. It has been our fear that gold would rally prematurely and fail to produce a sustainable trend once again going into 2000. In the past, every 8-year cycle in gold has produced an important low and the next target still remains 2000. A low under $252.50 next year will qualify for such an 8-year cycle event that should then be followed by a true bull market into 2007 peaking with the next Economic Confidence Model turning point. Given the fact that we have a Panic Cycle Year in 2005 and the underlying strength of our long-term momentum indicators, it would certainly appear that gold should exceed its 1980 high going into 2007. However, should gold rally into 2000 yet fail to break through the $400 barrier, this will prove to be the kiss of death and we must then be prepared for a collapse into 2003 before concluding this long-term bear market. Our Yearly Bearish Reversal remains at $192 and this is undoubtedly the major long-term support. Should this price level appear next year, then this could be the buy of the next century.

The outlook for the US 30-year bonds is one that is also highly correlated to the same global turning points. The prospect for a low in 2000 followed by a rally into 2003 remains alive and well. However, a break of the 9816 level will warn that a low into 2002/2003 may simply develop. The next Yearly Panic Cycle in bonds is showing up in 2003. Quit frankly, the entire period of 2002-2004 appears to be littered with high volatility in general.

On the currency front, the major highs during this century for the dollar came in 1920, 1932, 1940, 1949, 1968, 1976, and 1985. The major lows appear to have formed in 1914, 1929, 1934, 1948, 1960, 1973, 1980 and 1995. So far, the dollar on our index of 35 world currencies has continued to hold above its 1998 low. This suggests that there is still reason to believe that a dollar rally into 2002 remains possible. You will note from the list of turning points, that a dollar low is typically correlated with major highs in the stock market such as 1929, 1973 and 1980 for example. Dollar highs seem to be more correlated to lows in the stock market such as 1932. The evidence on a correlated basis suggests that should the dollar recover and blast off to the upside next year, this might result in a bear market into 2002. Such correlations do diverge if the capital flows shift resulting in a strong net inflow. This could then cause a strong dollar combined with a strong stock market along side of rising interest rates, During such periods where this combination evolves, one also finds a strong shift in assets between domestic to foreign ownership. Therefore, such a pattern would be possible if perhapsY2K were a true disaster outside of the United States.

The Japanese yen is the one currency that is always out of step with the rest of the world. The yen peaks and bottoms tend to be offset from those of Europe by two-three years on average. For example, while the European currencies bottomed during 1985, the yen bottomed against the dollar in 1982. There is little doubt that the 1995 low for the dollar/yen should hold long-term. A closing at year-end above 113.45 would signal that the reaction low of 1999 should hold. However, a closing BELOW 103.15 would point to even lower lows moving into 2000. We must keep in mind that the stronger the yen, the worse it will be for the Japanese economy. The major support of 100.83 is a Yearly Bearish Reversal. A year-end closing beneath this area will signal a complete meltdown ahead going into a low for 2000.

When we combine these key markets, there is little doubt that the global economy is facing a very critical turning point in 2000 that will set the tone thereafter moving into 2002-2003 with yet another major turning point in 2007. Maintaining this bull market in stocks beyond 2000 is critical to the development of a new-term correction. November is an important turning point and the first week of December is showing up as a very important Panic Cycle in many markets around the world. A high in the share market coupled with a low for the dollar against the yen would imply a correction into January or perhaps as late as April/May. This type of pattern would raise some hope that an April/May 2000 low could still be followed by a recovery going into 2003. However, a rally into April/May next year, even if from a November 1999 high/January 2000 low, would signal a potential risk of a bear market into 2002-2003. We must watch the DAX to see if new highs develop next year. If we see a high in the US and UK going into April/May, then if such a trend is not combined with new highs in the Nikkei and DAX, look out, for a correction and possible change in trend is near.