Superbull
Sees Dow 20,000 Coming
Ralph
Acampora, who Louis Rukeyser calls "the high priest of technical
market analysis," risked his career as Prudential Securities'
leading technical analyst by predicting Dow 7,000 while it was
still in the low 4,000s. His projection considered farfetched
back in the mid 1990s was based not on mystic prophecy, or short-term
numbers, but in something few investors pay attention to: history.
Acampora claims that "a Dow of at least 20,000 in the foreseeable
future is not out of the question" in The Fourth Mega-Market
(Hyperion 2000; September 2000; $24.95). He explains that we
are currently in a "mega market," a bull market with
gains of 500-600% that can last ten to seventeen years. By looking
at three earlier mega-markets that preceded our own (1877-1891),
(1921-1929), and (1949-1966), Acampora projects that our fourth
mega-market could last until 2011. That gives the current Dow
more than enough time (seventeen years) to complete the task
of rallying a total of 518.9 percent from its November 23, 1994,
low of 3,612. Such a move results in a potential objective of
Dow 22,354.67 by the year 2011. It gives enough leeway for the
stock market to have a couple of normally flat years and even
a few anticipated bear markets before reaching this lofty goal.
New industries the
railroad, the radio, and in our case the Internet and bio-technology
along with peace and optimism, are the key ingredients investors
should look for to spot a mega-market and ride it to the top.
Confident in his vision, Acampora explains how all indicators
point to this mega bull market continuing for many years, and
he offers three scenarios, all positive, for the decade to come.
In a conversation with
Ralph Acampora, author of The Fourth Mega-Market he explains
what a mega-market is and how the current mega-market stacks
up to those that came before. Here is that conversation:
Q. How did you make such a risky, and ultimately
accurate prediction of Dow 7,000 back in 1995, when the Dow was
in the low 4,000s?
A. At that time I realized
that several key economic and political factors were coming together
in such a way that could create an environment that would support
a multi-year stock market rise. After checking my facts, and
checking them again, I predicted that the Dow would hit 7,000.
It may not sound like the stratosphere today, but it was 60 percent
above the market's level at that time. And I said it would make
the jump within the coming three years. Not surprisingly, my
analysis met with a lot of skepticism. People thought I was overly
optimistic or completely nuts.
Q. How do you explain our "New Economy"
and the last few years' unprecedented stock market rise?
A. Contrary to what everyone seems to believe, the
current bull market is not "unprecedented." What we
are living through now has occurred three times before in our
history. In each of these periods there was a "New Economy"
that grew out of technological revolutions like the railroad,
the radio, automobile and the computer. These industries grew
at a rate just as astonishing as the Internet today. We are right
in the middle of what I have come to call the fourth great mega-market.
Q. What exactly is a mega-market?
A. I use the phrase
"mega-market" to describe a bull market that runs as
long as a decade or more. During mega-markets we can expect to
see gains of at least 500 percent to 600 percent over a period
that can last anywhere from ten to seventeen years.
Q. So if we're in this great mega-market, why has
the stock market been declining in recent months?
A. All bull markets, including the mega-markets I
am writing about, undergo sharp drops along their way to a peak.
Such periodic washouts are common and are necessary for a mega-market
to be sustainable over the long-term. The key to the longevity
of any mega-market is `rotation'. As long as the money comes
out of one area and moves into other sectors then the bull lives
on. In recent months, impressive rotation has been going on,
to the benefit of the depressed value stocks. All of this is
clearly evident in the improving tone of market breadth.
Q. How will the Presidential Election affect our current
mega-market this fall?
A. There is an uncanny relationship between presidential
election cycles and what happens in the stock market. Historically,
Wall Street greets new presidents from either party with a "honeymoon
rally." Investors are either glad that the old party is
out of power or thrilled that the policies of the previous administration
are going to be continued. Upon being elected in November, the
incoming president should theoretically enjoy this "honeymoon
rally" for several months or even into his second year in
office. Then we'll see a meaningful decline and sell-off ending
with a four-year-cycle low. During the last two years of a presidential
term the market usually works its way higher. The third year
is usually the strongest. Investing according to presidential
cycles has proved remarkably rewarding.
Q. Well, maybe Alan Greenspan has things in hand,
but what about his successor? How many more terms is Greenspan
likely to serve?
A. History again teaches us lessons here; Greenspan's
predecessor, a man named Paul Volcker, had to deal with the high
inflation fighter of the late 1970's. He had tremendous global
credibility as an inflation fighter and everyone wondered who
could possibly replace him! But, clearly, Alan Greenspan has
done an excellent job and is credited by many with steering the
economy along its present path. While no obvious successor seems
apparent, it is likely that whoever succeeds Greenspan will have
the same overall goals of keeping inflation down and promoting
the health of the economy.
Q. Could the fourth mega-market end in a crash like
1929?
A. One of the significant contributing factors to
the Crash of 1929 was the overextension of margin credit. This
means the people were able to buy stock with little cash and
finance the rest of the purchase using stock as collateral. As
stock prices fall, their collateral loses value and people have
to either come up with more cash or sell out their stock holdings
(that's a margin call). That, in turn, increases the selling
pressure, and in downturn becomes a free fall. Lessons were learned
from 1929, and from subsequent downturns in the market. As a
result, margin credit has been tightened. Stock sales and mutual
funds are closely regulated. Program trading limits have been
imposed. That is not to say that risk does not still exist or
that the market is devoid of speculation. But I do not expect
the Great crash to ever be repeated.
Q. What would make you bearish and negate your mega-bull
market scenario?
A. The primary consideration would have to be another
serious war. The Persian Gulf War and the problems in Kosovo
are not the same as WW I or WW II or, for that matter, Korea
or Vietnam. Yes, there are trouble spots, but they tend to pose
a general threat and not just to the United States. For example,
India and Pakistan have made ominous noises to each other and
a conflict there raises the specter of nuclear war. but Japan
and other nations in the region have a strong interest in not
seeing this happen. Thus, the likelihood of a large-scale conflict
is minimized by the realization of what it would cost and the
fact that so many countries would be negatively affected.
Q. You wrote that previous mega-markets have quite
a few positive traits in common. Are there any disturbing, negative
similarities?
A. Yes, there are a
few similarities that are problematic. Let me start with the
obvious one, sentiment. Without a doubt, investors got too carried
away with their fast profits during the market's explosive rise
between the October 1998 low and the first quarter of the 2000
high. They piled into small biotech stocks, unknown dot-com issues,
Internet companies, and others. An air of hysteria characterized
the market. Even the novice technician could identify the trend
as irrational and not sustainable. To say that some of these
stocks will not rally even halfway back to their lofty highs
is being kind.
A second and most disturbing
element is the problem of breadth in mega-market. Both the NYSE
and OTC advance/decline lines dropped precipitously during the
frenzied rally mentioned above. Unfortunately, these lines represent
the direction of all stocks on their respective exchanges, thus
the majority issues never enjoyed what, on the surface, appeared
to be an exciting bull market. I call the divergence between
the Dow Jones Industrial Average and the A/D line a "stealth
bear market." And for those who refused to believe the declining
price trends in their respective stocks because the Dow was headed
higher, were indeed in a bear market.
Q. It sounds like you just described the end of a
mega-market. Is that where were are in the fall of 2000?
A. I don't think that
I described the end of a mega-market. In fact, the long-term
divergence between the Dow and the NYSE advance/decline line
(breadth of the market) is not unusual in a mega-market. This
disparate trend lasted ten years during the third mega-market
before any serious sell-off occurred in the DJIA. I still expect
this kind of long-term divergent activity to continue because
in mega-markets it is the new technology (New Economy) of the
era that will dominate over time and this dominant leadership
will manifest itself as the split in the stock participation
continues.
Over the lifetime of
a mega-bull market, growth and technology stocks will lead. Of
course, there will be periods where leadership will revert to
value and to the small and mid-size capitalization stocks. It
is the ebb and flow between these leaders that makes market timing
so invaluable. Rotation is the lifeline of every mega-market.
Q. Does the market still work in four-year market
cycles or has our "New Economy" changed this?
A. Yes, four-year cycles have proven consistent. The
current mega-market actually began with a four-year market low
in November 1994. The prior four-year low was registered in October
1990, measured by the DJIA. By extrapolating this four-year series
out in one time, we see that another important market bottom
was made on August 31, 1998 (the Dow's closing low of 7,539.07).
If history is any guide, then the next major lows should come
in 2002, 2006, 2010, etc.
Q. Can you explain the sell-off in high-tech and Internet
stocks in the spring of 2000?
A. To help answer this
question, I must share with you a conversation I had early in
2000 with Arthur Levitt, head of the Securities and Exchange
Commission. I asked him what his thoughts were regarding the
hectic and speculative pace of day trading by the fearless "pump-and-dump"
crowd in the chat rooms on the Internet.
In a priestly voice
he simply stated, "Ralph, the market will teach them a lesson."
Within weeks, the market indeed turned against this fast crowd.
And I welcomed the severe drubbing endured by the high multiple
(ridiculously overvalued) stocks. The smug confidence of these
day traders had to be reined in. The market is not an arena for
gambling. Good, old-fashioned investing with proven fundamentals,
must be the order of the day, not some hot tip begotten by "word
of mouse."
Q. Aren't you worried about the increasing public
interest in the stock market?
A. In a word, no! First of all, the public is tied
to the fortunes of Wall Street more today than any other time
in history. People have good reason to be attentive to what is
going on in the financial community because of their involvement
in IRAs and 401(k) plans. They need the information, and the
popular business TV shows are educating them.
Q. Won't the retirement of baby boomers cause money
to pour out of the stock market?
A. No. Even the sharp decline in April 2000 could
not totally discourage them from putting money into the stock
market. Their 401(k) plans remain, but they are shifting or rotating
funds between sectors, and this is what keeps the mega-bull market
alive.
Q. Do you see any impending runaway inflation that
could endanger the market?
A. Here again, the
answer is no. There are no serious signs of inflation, and Alan
Greenspan and the Federal Reserve have been vigilantly easing
interest rates up to squeeze out any potentially inflationary
factors. Greenspan's concern that the "wealth effect"
from the stock market's gains over the past several years is
having a negative impact on the economy is well founded. In early
2000 there were signs of "irrational" behavior on the
part of the gangs who day trade. His rate hikes have periodically
scared this segment of the market, creating brief mini-bear markets
that eliminate the excesses.
Q. Is the technology revolution over?
A. No. Some biotech-
and Internet-related stocks did break sharply to the downside
early in the second quarter of the new millennium. But the young,
talented people in Silicon Valley are still hard at work. New
discoveries in medicine and advances in computer and Internet
technologies are continuing.
Q. You're a technical analyst. What exactly does
that mean?
A. As a technical analyst, I'm a market timer. I study
the forces of supply and demand in the marketplace to determine
when to get into (buy) and out of (sell) a stock. Technical analysis,
if used correctly, should help identify both bullish and bearish
markets. I hope more investors will take advantage of its usefulness
and apply its theories and basic tenets to stock purchases and
sales.
Q. What drew you to technical analysis?
A. I fell in love with history as a boy growing up
in the Bronx in the years after World War II. The energy, excitement,
and pride were all around me. I could feel history long before
I understood its lessons about people, countries, and markets.
I also studied history passionately while in college and a Catholic
seminary. I didn't know if I could make it on Wall Street because
I did not have an educational background in fundamental analysis
and economic theories, but when I learned charts in the sixties,
I knew I had found a way to apply my love of history to a career
in investment research.
Q. Why don't more people on Wall Street look to technical
analysis?
A. Most academics believe
in the efficient market hypothesis all information that could
move a stock price is known to just about everyone simultaneously.
They argue that since news about a company's sales, earnings,
marketing efforts, or technical snafus is communicated just about
instantly to everyone, it is impossible for one person to see
a trend earlier than anyone else. To them, it's impossible to
anticipate a market turn. I can honestly say that I have dedicated
most of my professional career to proselytizing for technical
analysis. I have taught it every other Monday night for the last
three decades. I have a mission to convince the financial community
of its value. More recently, with results from credible research
and the success of several technical analysts, our reputation
is improving.
Currently, many respected
colleges and universities, along with an ever-growing list of
reputable professors, are teaching their student's technical
analysis. They realize that the market is `not' total efficient
and that behavioral finance must become an integral part of one's
financial education.
Acampora cautions that
investors should expect periodic corrections, sharp drops, and
even washouts along the way to the peak. These short-term bear
markets, he explains, are necessary for a mega-market to be sustainable
over the long term. But, knowing when to expect these interruptions
can help prepare investors to buffer their portfolios.
With "rational
exuberance", Acampora says this mega bull market will continue
to run for many years, and he offers three optimistic scenarios
which he classifies as great, greater, and greatest for the years
ahead. Armed with The Fourth Mega-Market's thorough grounding
in what drives the market, investors should be able to plot their
own successful course in this volatile and potentially lucrative
bull market for many years to come.
