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|Mark's Column Professor Kai Keung Mark|
Dow corrects not because of rising interest rate outlook(May 15,2004)
DJIA has made sharp drops in recent days, and most of the financial analysis explain it as a reaction to rising interest rate outlook. I disagree. To understand the likely movement in the future, one must understand the cause of the current event as an essential requirement for accurate forecast. The author did make a very accurate forecast that HSI will peak on 14,000 point (1/9/2002, 3/3/2004) but not so correct on the time of its completion.
It turns out that the correction took the two-wave form instead of the suggested one wave form (April 1, 2004), and up to now has not completed yet. At the time of writing the last article (April 1, 2004 ), DJIA was posting a rising mode, and so the author anticipated that HSI will follow, and so did HSI to reach 13,000 point. However, DJIA stop around 10600, and form a very clear upper return line (see fig. 1). With this upper return line, a clear mild correction pattern become apparent. Using the March low as a reference to draw the parallel lower support line, and this predicted that DJIA will drop below 9900 point (see fig 1). With this proposed channel formation, one can perceived that Dow is forming a mild correction which is long over due. With this chart pattern become apparent, one can forecast that DJIA will soon hit bottom between 9800-9900 points, and will soon rise again to resume its bull trend. This correction has nothing to do with the rising interest rate outlook, because DJIA did rise starting March 2003 from 7,400 and reached 10700 on February, 2004 without a correction, which is not the normal stock movement pattern.
A large number of the top brains of the world concentrated on the financial markets. They all should know that in the bull phase, interest rate must rise, but rising interest rate in the beginning has little effect on the economy in the past 50 years, and all these smart people in financial market should all account for this, and should post no surprise to any one. Thus there should not be a reasonable excuse for the DJIA's fall.
The high oil price is a bearish factor, and to the author, this is the true element to induce DJIA to make a dramatic drop. According to the author's logic, high oil price will slow down the imminent interest rate rise instead of the popular believe that it will speed it up. High oil price should slow down economic growth world wide as illustrated by history, and so is higher interest rate. Mr. Greenspan is smart enough not to double the needed dose if he thinks that the US economy is going a bit too fast, especially during this sensitive election year.
In summary, the current DJIA drop is the final phase of a necessary correction, which should be over soon if oil price does not rise excessively. But the dip is not caused by the expected US interest rate rise which should linger on for several months (i.e. till August, 2004).
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