The Importance of Market Perspective

by: New Low Observer

The information that is being provided on the website is top notch. So good is the information on this website that it should be the beginning course for every investor. However, there is a disservice being done by those who take this information but don't put it in its proper context. The information that I'm referring to regards a Bull and Bear Market Rally Chart that depicts the performance of the Dow Industrials, S&P, and the Nasdaq indices during major declines in history compared to the most recent decline. The reaction to this chart, if you're a stock market bull is a glazed over, panic-stricken stare. If you're a stock market bear you're probably salivating with eager anticipation and excitement.

The problem with this chart is that it is being used by "bears" as a cautionary tale of what is to come (i.e. 1929 to 1932-type decline). However, these indices, while similar (they're all traded in the U.S), are not the same and should not be compared to each other, especially when we have data on the Dow all the way back to 1896.

More important than what is shown is what it doesn't show. The chart doesn't show the periods in history when the Dow declined by 40% or more in one move as has occurred since October 2007. In every instance that the Dow has fallen 40% or more in one fell swoop, as it has recently, the market rebounded 50% to 100% every time.

  • Jan 19, 1906 to Nov. 15, 1907 decline of 48.3%
  • Nov. 15, 1907 to Nov. 19, 1909 increase of 89%
  • Sept. 30, 1912 to Dec. 24, 1914 decline of 43%
  • Dec. 24, 1914 to Nov. 21, 1916 increase of 107%
  • Nov. 21, 1916 to Dec. 19, 1917 decline of 40%
  • Dec. 19, 1917 to Nov. 03, 1919 increase of 81%
  • Nov. 3, 1919 to Aug. 24, 1921 decline of 46%
  • Aug. 24, 1921 to Oct. 14, 1922 increase of 61%

All of these declines and increases occurred within the bear market of 1906 to 1924. This was a period when the Dow started 1906 at 100 and didn't close permanently above 100 until after July 1924. While I understand the dire nature of the markets and the financial system a sucker's rally has to start soon. Every 17-25 year period of bear markets has had similar action and reaction. This means that either we're going to get a suckers rally or this is really the bottom in the market.

Some could accuse me of being selective, but the facts and truth are consistent. 100% of declines of 40% or more result in a reaction of 50% or more. If you can find a period that doesn't meet this criteria then pass it along since I need all the information that I can get. By the way, if you want to school me on 1929-1932 then please read my breakdown of this market decline in my Big Picture Observation and 1929 article.

It is likely that "this time is different" and I'll be proven wrong. However, I feel that a little perspective is necessary on this topic.