Asia-Pacific stocks suffered their “worst first half [of the year] since 1992,” reported news headlines this week. On July 1, a survey of Japanese manufacturers showed that companies expect earnings to decline for the first time since the 2001 recession. A survey in China showed that manufacturing in that country last month expanded at its slowest pace in three years.
You might think that the reported slump in manufacturing in the region’s two biggest economies might be a big reason for the poor performance of Asia-Pacific stocks in the first six months of this year. And, in a way, you’re right...but probably for the wrong reason.
Most analysts focus on China's manufacturing decline and say, “A-ha, lowered sales of manufactured goods contributed to the stock market correction of the past several months. The market anticipated this event.” It’s true that the stock market decline and the lower demand for manufactured goods are related — economists figured out decades ago that the market leads the economy by six to nine months. Asia-Pacific stocks have been declining for about that long, so a manufacturing slump now is no surprise.
But the failure of conventional observers to explain why consumers started buying fewer manufactured goods in the first place leaves their analysis lacking.
We at Elliott Wave International have an explanation for the changes in the tides of both the economy and its stock market — an explanation that gives us an advantage in forecasting compared to conventional analysts. It’s the natural waves of creation and destruction in society that Ralph Nelson Elliott, who first discovered the Wave Principle in the 1930s, called “Nature’s Law.”
Any honest observer of human society must admit that boom and bust cycles are a part of history. As Elliott’s intellectual heirs, we advocate viewing those cycles as inevitable and – and this is crucially important – patterned.
In the case of both Japan and China, five-wave “impulsive” Elliott wave patterns ended at the 2007 highs in the Nikkei 225 and the Shanghai Composite. By definition, those patterns then required significant corrections—which have since taken place. Contractions in investment and spending usually attend significant stock market corrections. So it’s natural that both investors and consumers throughout the Asia-Pacific region now feel like buying less. The good news is, once the down cycle pattern is complete, it will be followed by another up cycle.
It really is that simple. Albert Einstein, once asked to explain why electricity displayed a certain property, responded, “That’s just how electricity behaves.” In effect, Elliott said the same about the stock market.
For a recent example of how we use patterns to forecast prices, look at the three charts below.
More than two months ago, the April 25 issue of EWI's Asian Financial Forecast said that “some markets may pull back temporarily as they complete right shoulders of inverse head-and-shoulders bottom patterns.” We showed the Nikkei 225 chart below as a representative example (we have removed the Elliott wave labels from the chart for this presentation).
One month later, the June issue of AFF showed how that forecast for the region had progressed, using Japan’s TOPIX, Hong Kong’s Hang Seng, and Singapore’s Straits Times Index as examples (see chart below; Elliott wave labels removed here also). The report added: “The final lows of their right shoulders will likely be higher than the lows of their left shoulders in January.”
Now, two months since the original “inverse head and shoulders” forecast, the major indexes have fallen in a manner that fulfils the requirements of the pattern, as seen in the chart below (current as of July 1).
So, while the news that Asia-Pacific stocks suffered their “worst first half since 1992” may have come as a surprise to a lot of investors, Elliott wave fans were prepared for the declines.
Are declines in Asia Pacific Stocks finished? Read the latest, July Asian Financial Forecast for details, risk-free.
Mark Galasiewski (gala-SHEV-ski) began his career in 2001, as a fundamental analyst at an institutional brokerage in Stamford, Connecticut. After joining Elliott Wave International in 2005, Mark contributed to Robert Prechter’s Elliott Wave Theorist before launching EWI’s newest publication, the Asian Financial Forecast, in April 2008. Mark has traveled to many of the countries whose markets he analyzes; in the 1990s, he lived in Japan, where he observed that country’s extended bear market first-hand. Mark is fluent in Japanese and conversant in Mandarin Chinese. Be prepared to get his unorthodox insights into the Asia-Pacific stock markets in every issue of the Asian Financial Forecast.