Tuesday, June 1, 2010

The Second Wave of Great (Deep) Recession is Around the Corner

The much awaited second wave of great recession is around the corner. The first wave started with a sudden shocking wave coincident with local problems (Relpower finance, Weekend holidays and late morning opening times for banks) and global causes (Powershow of FIIs in shaking markets). It ended finally like a bloody war ends, with many interesting events along the way (Oil prices flare-up, Russia correcting Georgia, finishing touch with year-end quarter meltdown). Of all, the most memorable was the September-October meltdown that rocked all businesses worldwide. Life was never the same. Everything became 1/3 :-).

The sudden tsunami wave on Jan 22 2008 had suggested the depth of the then upcoming recession. Many analysts announced that it would be worser than the Great Depression of the past century. That meant that it won’t be like a small recession in a growing economic scenario. That is why it will have its own waves or trends and counter trends. The first wave has passed (2008) and also the first counter trend (last year’s intermediate bull market trend or temporary economic growth).

There is an Elliot Wave Theory on stock market movements. This theory talks about five waves in a particular trend. In those five three will be in the same trend and two will be counter trend as illustrated in the figure. It is also showing three more waves after the peak.

second wave of recession, elliot waves, stock market movements
Elliot Wave Illustration (cc-licensed image)

Basically we can take two ideas from this. That is, a particular trend once established gets completed in three in-trend waves with two counter-trend waves of lesser strength separating each of them. And the counter wave moves the market back less than the in-trend wave moves it. That is retracements or pullbacks won’t exceed the damage or growth done by the initial moves. If they do that indicates trend reversal and more strength in the counter trend so that it establishes a new trend.

When recession appeared to start in January 2008 it was thought of as a healthy normal correction like any other time in the past few years before 2008. The stocks in mid December 2007 to first week of 2008 were all skyrocketing. Dummies too got a life. Too many stocks were making into the list of 52-week highs. Unfortunately I didn’t realize what I was witnessing. That was the peak of the bull market (in other words like Everest for a mountaineer). Even if you had traded stock after stock with strict stop losses making sure to trade as many stocks as possible you would have made all the money that the same capital would have earned in long term trades in the three years of bull market before that month.

I just guessed that this (great) recession would be a nine month recession like a temporary counter trend in a long term bull market trend. But things changed (or became apparent) rapidly in 2008. Then I had to expect a nine month growth period (counter trend in a long term bear market) after the first wave. This trend started with its own shocking wave (should I say so - on May 18 2009, UPA winning India’s elections) and revived all the stock broking businesses by now. It must have been a good ride for those who had participated in it (as the stats show).

Like the sequel of a movie series I don’t expect the same action/thrill in the second wave as it was in the first wave. As the governments over the world have intervened in the way of the economic recession to maintain the status quo of old heroes and suppress the newcomers, we may not have to expect the same effects of this wave as that of the first one. Rather than expecting something I want to be a spectator for this wave. If there is anything we should watch out for the third wave which is likely to coincide with 2012. Let us wait and watch as the future unfolds itself.

Update (04/06/10): When I said "we may not have to expect the same effects of this wave as that of the first", I also mean that the stock indexes might actually go up instead of down (that will be the effect of inflation which is the effect of governments intervention into business).

Update on 18 Dec, 2011: Well the future is unfolding now. 2012 seems to unfold a great deal of action, not the action in the movie 2012, though :) But in the financial world. I think the future is more of a re'grow'ce'th'ssion than simply growth or recession. Recession and growth happening parallelly, recession for those who can't compete and growth for others who see and exploit opportunities fast.

Prolonged period of uncertainty is expected as people evolve and learn from previous recessions. No matter how much it gets prolonged the worst part of dramatic action can't be escaped. If it gets prolonged much, its effect will only be worse. The history shows that the last legs of recession are always worse. I used to say, things will only get better before they get worse. The best part may be getting over. Now I would say things won't get better, this time, after they get worse.

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