Book: The Fourth Mega-Market
Author: Ralph Acampora
Key takeaways: This is a book that relies heavily on technical analysis to argue that the fourth “mega-market” was underway in 2000-01, after starting in the ’90s. While some will casually toss away the book citing the dot-com bust, (a) it is important to remember that this particular correction was concentrated in the tech stocks, and (b) there are still some lessons from the book that are interesting/thought-provoking, if not useful.
TECHNICAL ANALYSIS 101
Where Technical Analysis Fits In: Acampora says one needs to think of the following factors when analyzing markets –
- General sense of economy: interest rate, GDP growth etc.
- Fundamentals: researching sectors/groups that would work best
- Quantitative analysis : P/E multiple etc
- Technical analysis : “you do all your homework, and then–and only then–you time your decision to buy or sell”
Now, whether one agrees with the framework being put forward or not, I think the key point here is to understand the last bit: that technical analysis is used to help time the decision to buy/sell, but whether/what to buy/sell is being decided by fundamental/quantitative analysis.
How to Read a Stock Px Chart:
- What are the stock’s minor and major trends
- What is the support level?
- What is the resistance level?
- Realistically, how far up, or down, can we expect the prices of the stock to go?
A classic bull market starts with a run-up in prices of blue-chip stocks. As the bull-market progresses, investors become more confident, and they become very likely to change their equity mix: they become willing to take bigger risks. At this stage, the secondary issues will provide new and more exciting stories, and will be fundamentally more attractive as value-plays. Finally, the lure of rising stock prices will attract more and more buyers, ushering in the 3rd stage of the bull market. These new participants are less likely to know what they’re doing and would be more likely to demand unreasonable returns. The stocks bought in this stage can only be described as speculative.
Acampora bases his very simplistic thesis of mega-market on the following simple tenets –
- War is inflationary/unproductive/time of fear and despair; peace is deflationary/productive/time of hope and prosperity
- That said, he adds, peace/prosperity following war does not emerge immediately, as the government stops buying war material drying up industrial orders (ala “inventory recession” of Jan ’20 – mid ’21 after the WW-I).
- Low inflation (somewhat follows from whether a war is ongoing)
- Low interest rates (of course, follows inflation)
Advance/Decline Line: Acampora says that ordinarily, 3-6 months of negative breadth (more losers than winners) results ins some kind of market sell-off or correction. BUT, in a mega-market, he says, long-term negative breadth is actually normal (!!). He cites the A/D line for the bull market ending in ’29 as an example where the A/D line began diverging from the Dow beginning in ’25 (though truly declined in ’28–reaching a lower low, and then a lower high).
- When bad news can’t take the market down, it’s good news.
- Rotation is the lifeline of bull markets.