The Fall 2007 Rally by Ken Fisher

The article was written for Forbes.com by Ken Fisher on 17 September 2007.

The Fall 2007 RallyDon't let this fall's rally whiz right by you before you take a close look at stocks from Asia. The midsummer correction--at one point on Aug. 16 the Morgan Stanley World Index was down 12.5% from its 2007 high--provided a great time to get into stocks on the other side of the dateline.
If you don't own this region, now is the time to get in.

When the rally resumes, Asia will lead. These stocks are to this market what tech stocks were to the mid-1990s.

What makes me so sure that we're in a rally, not a long-running decline?
Four things.
The first has to do with the shape of a bull market termination. The final peak does not arrive sharply. It tends to have a gentle upward slope, as the final but diminishing round of suckers is drawn in. And then the decline (usually) begins with a gentle slope, too (October 1987 was the exception proving the rule--over almost instantly), as some buyers continue to come in even after the bull market is over. The bull market leading up to the July 16 peak was too sudden and the plunge too sharp to presage a real bear market.

Second, bear markets don't start from old news. In this case the old news is that many subprime borrowers are going to default on their mortgages. While this misfortune is still unfolding, the basic facts have been out for a while. A fundamental rule of markets is that old news runs out of power. It takes new information to move stock prices.

Third, it usually takes a severe credit crunch to set a genuine bear market in motion. This credit crunch, at least for corporate borrowers, is not severe. You measure crunch by the spread in yields between junk bonds and Treasury bonds of like maturity. In 2000 that spread widened by three to four percentage points, a harbinger of both a broad tumble in stock prices and an economic contraction. In that case, moreover, the widening spread came atop rising Treasury interest rates--weak corporate borrowers had two strikes against them. Contrast that with what's happening now. Junk spreads widened by only a percentage point before going back the other way, and much of the widening was from a fall in Treasury rates, hardly bearish. This is a phony credit crunch.

Fourth, the media always jump on a short-term correction but rarely wake up to a long-term bear market in its early phases. One form of this media attention is trotting out the perma-bears to deliver their "I told you so" speeches to the tv cameras, with scenes of the New York Stock Exchange running in the background. Generally speaking, the friendly interviewer conducting the show neglects to ask the bear when he first turned bearish and how much the market is up since then.
As with all corrections, a few months from now we will be wondering what the fuss was about. And Asian and Indian stocks will be much higher.


Who is Ken Fisher is why should we take his words seriously?

Kenneth L. Fisher was born on November 29, 1950 in San Francisco, California.
Ken is the third and youngest son of Philip A. Fisher, renowned investor and author of classic investing book, Common Stocks and Uncommon Profits, which remains relevant and in print to this day.Ken is the only industry professional his father ever professionally trained, having worked for his father in the early 1970s.
Ken is currently ranked 297th on the 2006 Forbes 400 list of richest Americans.