Scrutineer: Chartist predictions raise chilling questions over just how far markets have yet to fall

THERE is a long-held wisdom that if there is a majority view that the stock market is set to go decisively in one direction, it is just as likely to move in another.

Let's hope this proves to be the case because the strengthening view in recent weeks is that stock markets may be on the brink of a further savage lurch downwards to new historic lows.

How much lower? Chart analysts are talking of a lunge downwards from the current FTSE 100 level of 3,830.09 to 2,800 and possibly to as a low as 2,300. A fall to 2,800 would represent a 27 per cent fall and to 2,300 a plunge of 40 per cent.

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Such falls would inflict horrific losses on pension funds, suggest a tidal wave of company insolvencies and would represent a flight from equities on a scale not yet seen in this bear market.

Now, there is nothing guaranteed about chart analysis – the investment philosophy built round the study of share price and index movements. It is an esoteric world of down waves and corrections.

At its heart are deep ambiguities about the beginning and end of wave movements and the interpretations of chart patterns. But technical analysts have been signalling for many months that markets were embarked on a historic collapse and their forebodings have rung ominously true as each upward correction has been followed by a further severe down wave.

Last week the UK stock market fell by a further 1.5 per cent, taking its decline since the start of the year to 14 per cent. However, the FTSE 100 index is still some 70 points above the current bear market low hit last November.

In America last week the S&P 500 index fell by 2.83 per cent to a level not seen since 1997. US shares hit a 12-year low on the back of appalling data on the economy and news that the government is set to take a stake of up to 36 per cent in the stricken Citigroup, once the world's biggest investment bank.

Chartists now warn that the S&P 500 chart pattern "portends carnage by projecting a target… down to 375, wiping another 50 per cent off the index".

The chilling question that now has to be asked is that if equity markets are already discounting a severe recession, what is the reality they would be seeking to discount on a collapse to 2,800 or 2,300?

Such a fall would suggest not only that the desperate stimulus packages put in place by governments will fail to pull their economies out of a severe recession, but prospects are set to become appreciably worse: an epochal insolvency.

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A critical factor here is this severe and deepening recession is hitting almost every economy in the world. Factory output is collapsing everywhere and at rates of stunning ferocity.

From America last Friday came news of revised fourth-quarter data showing the economy contracted at an annualised rate of 6.2 per cent, making this the worst downturn since the Second World War. But America is not alone. From Japan to the Ukraine, Spain to Singapore, latest figures for industrial output are dire.

So far there has been little evidence of the sort of political and social disorder that accompanied the 1930s Depression. However, economist Stephen Lewis of Monument Securities warns that we have been lulled into a false sense of security by the lack of pictures of soup kitchens.

"The temptation for investors," he writes, "is to see this as just another recession over by the end of the year. But this is no normal cycle. It is a cataclysmic structural breakdown."

So the puzzle is perhaps less why markets should collapse further but why they have stayed so relatively high for so long?

Since the summer 2007 peak, the FTSE 100 has fallen 44 per cent. But that is by no means the worst fall suffered in recent decades. The fall from the peak of the dotcom boom in late 1999 to the spring of 2003 was 53 per cent. And the fall in the FT 30 Share index from the late summer of 1972 to January 1975 was in the order of 73 per cent. A fall of similar magnitude from the recent peak of 6,900 would take the FTSE 100 to below 2,000.

Another way of projecting future levels of the market is to study the cyclical price-earnings ratio. This is standing at 12, close to its historic average. But in previous bear markets this ratio has had to reach six-to-eight before the stock market bottomed. This would imply a level of around 2,500 on the FTSE 100.

That chart analysts are warning of a collapse from current levels does not mean it will inevitably happen. But it is beyond doubt that the world is experiencing something momentous – far more than a normal downturn – and massive reflation measures will be required.