Will History Repeat Itself?

There is certainly fear running around global stock markets and the possibility of a second dip is getting higher and higher.

The ultimate fear index:

The DXY accurately predicted the previous stock market plunge in 2009. Will this time be the same? Undoubtedly, the fear is confirmed and the VIX index is also correlating with DXY. One thing is for sure, the fear factor is very high.

Everyone is rushing towards cash. The problem now is to predict the reversal of such trend in order to profit from it. Inability to make good judgement could result in financial loss or loss of opportunity.

It is now a strategy play and this time is against the possible recovery of finanical system problem in the Europe and also the side effect that may put big hurdle to the global economic recovery.

If the DXY is a good indicator, this fear may also be overdone as shown in the double peak above back in 2008-2009. The first peak doesn't lead to major plunge in stock market. It was due to the Lehman bankcrupcy which was very limited to the company itself only. The second peak of DXY was due to the potential collapse of US big banks like BAC and Citigroup. The US government bailouts saved the banks.

This time round is the entire Europe. Greece is the starting point like Lehman Brothers. The EU bailout is similar to the US "too big to fail" bailout. Historically speaking, bailout should work at least for a while. One should expect the market to calm down a bit after the bailout but and yes, there is a "but" here, EU consists of many countries unlike there are only two parties in the US congress.

This also led to Warren Buffet's "fear" of the current situation and unprecedented EU bailout itself is a risk as it is an unknown factor. Investors don't like uncertainties and this could shun any potential interest in stocks.

Back in March 2009, US earnings reports were really bad and this time round US earnings are actually very good. But that isn't adequate to boost investor's confidence. Dr, Doom (Roubini) is also giving stern warning like the one back in 2008, coupled with Richard Russell who is giving a warning that is worse than Dr, Doom (Sell Everthing Liquid!), the fear this round may surpass the one back in March 2009.

Back to Bursa Malaysia. During March of 2009, companies are reporting bad reports as those in the US. This time round, the reports are as good as the rest of the world. Eventually rally in stock market must jive with good earnings and that is what stock market is all about, business.

My conclusion, this fear could be overdone as it may not affect the earnings of companies that are not relying on Europe's economy. If US companies are getting a hit in their earnings, it is time to "sell everything liquid". If not, it is a good time to "slowly" buy the stocks of good companies. The next earnings season is in September. That's the time we should "sell everything liquid" and wait for further signal from earnings reports of US companies.