V Bottoms and the Twin-Peaked Bear 25 comments
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The consensus I tend to read amongst market commentators is that when this market bottoms, it will be a V-shaped affair. Now, I mainly write on precious metals, but it would be foolhardy to presume that the fortunes of these two separate assets classes are not linked in some way. After all, if money is flowing back into the stock market, that means there is less money to flow into other asset classes such as gold and silver bullion products. I am also aware that most investors will be diversified in their asset allocation and will not only be holding gold or silver but will also be looking to re-invest in general equities at an opportune time.
People may say that the 2000-2009 bear market will have put many investors off equities, but that in my opinion is a different matter to how the market will actually perform in term of percentage gains. The truth is that hard sell-offs lead to hard buy-ups. To get an idea of how the rebound in the markets may pan out, let us look at the equally great bear market of 1968 to 1974. First we chart out the current bear market below for the S&P 500. (Click charts to enlarge.)
Let me start off by giving another opinion. If this rally extends to over 800, then the nine-year bear is most likely over and done with. But now we display the chart for the 1968 to 1974 bear and its subsequent recovery.
There are some similarities between these markets, and to borrow from Mark Twain, bear markets may not repeat but they do rhyme. The bear market began in 1968 as inflation began to grip, and an extended bull run from the late 1940s finally exhausted. New highs were made in 1973 but it was no more than an abortive rally and the bear market re-asserted itself with full vigor as the markets plunged 50% as the economic woes of an oil shock and continued inflation took their toll.
As fear gripped the markets, gold in parallel rose from $120 to $200 for a 67% gain but topped out three months after the S&P 500 bottomed, to enter its own two-year bear market before the historic events of the late 1970s. Included in the chart are the 50- and 200-day moving averages (red and green respectively) and the RSI indicator is in the lower section. Note how the index hugs the 50-day moving average fairly well. When the 50-day moving average got back up above the 200 day average, the recovery was already underway.
But when fear was at a maximum and “blood was flowing in the streets” the market underwent a transformation and on October 7, 1974, hit a final low of 62. By the following July it had to reached 96 for a 55% gain. By June 1980 the old highs had been reclaimed and the great 1980s bull was in progress. The point being that despite the bad news permeating the markets, the S&P 500 put in an impressive V-shaped bottom.
How does that compare to the current downturn? Like 1974, we have a “twin peak” bear where the index drops and rallies to near the old highs before crashing again (this is called a flat wave in Elliott wave terms). Likewise, the markets have shed a similar amount (so far) of about 65%. Like 1974, the S&P 500 is trading tightly below its 50 day moving average.
Meanwhile gold has gained against the S&P 500 by 33% during this 15-month drop though the path it took is more erratic than the 1973-1974 drop.
So we have similarities, but will the recovery be as dramatic as 1974 to 1975? People say that investors will stay away from equities – especially baby boomers – but back in late 1974 investors had endured six years of poor stock performance and yet the rebound was great. We should be prepared for a similar event.
How may one play this upcoming surge? There are several ways of approaching this, but looking at 1974-1975, one technique that played it safe was to wait until the 50-day moving average climbed back above the 200 day moving average in March 1975. By then the market had gained about 35%, which was the price of a less risky approach. Clearly to execute that strategy you need a conviction that the multi-year bear market is over. If you believe the crisis that has hit us this past year is far worse than what happened in the 1970s, then you will be obliged to wait longer.
For me, the dawn of major new bull market approaches fast.
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This article has 25 comments:
please compare SPX from 1929-1941 and SPX from 2007- present. please, this is a repeat of great depression, not 70s. wake up!
I think neither extreme is true. We were at no point about to collapse into chaos, nor shall we in the forseeable future. The market is unlikely to have a sustainable rise until 2011 or 2012. My guess is that the SP500 will make many oscillations in the range between 600 and 900 for a long time to come, perhaps with brief excursions outside this range. The final break out upwards will be after the excesses of the last fifteen years have worked themselves off, and after our economy has adjusted to more normal and sustainable work, production, and consumption patterns, possibly within five years.
That is the rapidity of the dissemination of News in this Bear/Recession/Depress... whatchamacallit.
How much is reflected and already built in, and what is left to unfold is the Crux.
That and more cockroaches.
Come on folks, short-term, reactionary thinking is a big part of what got us into this mess.
We still have lots of rough times ahead, with lots of ups and downs. I don't expect this recession to take us down and then bubble right back up like the dot com bust. There are way too many moving parts, impacting way too many industries and markets.
Patience is a virtue.
The world economy has shrunk by 40-50%. As is too often, the Mr. Market had it all wrong last year. My fifty years as a pro has proven that you have to know when to hold them and when to fold them to survive markets that are seldom rational.
The Administration's current tax, economic and security policies must change before Mr. Market will see any of my money. Hopefully, the country will get a Loyal Opposition to the Socialism we are seeing in the U.S. Even Europe has railed against our policies which should wake up the most liberal tax payer out there.
But the economy will take a long time to absorb this reduction. It will happen, and it will be a good thing for everyone.
And Mark Twain was speaking of history, not a stock market index.
On Mar 15 11:11 AM Prudent Man CFA wrote:
>
> The world economy has shrunk by 40-50%. As is too often, the Mr.
> Market had it all wrong last year. My fifty years as a pro has proven
> that you have to know when to hold them and when to fold them to
> survive markets that are seldom rational.
>
This was (is?) a standard bear-market rally. Nothing fundamental has changed, the worthless are rising even faster than the high-quality downtrodden, and the main driver is working off extremely oversold conditions. You can start looking for a bottom when the worthless garbage gets left behind on the way up. Then you will be seeing not short squeezes and oversold bounces but investors finally recognising that there are some quality businesses with decent balance sheets available at prices that imply imminent collapse. When real money steps in to buy the wheat but the shorts don't cover their positions in the chaff, you may not see the dramatic 6% up days in $SPX, but you will be seeing the beginning of a meaningful recovery. The reality is that a lot of these companies are going bankrupt, but most aren't. For the last 9 months the market has not bothered to distinguish between them. Once it does, prices will bifurcate, the creative destruction process will get under way, and a real recovery will be on.
On Mar 15 12:38 PM Alphameister wrote:
> I happen to agree generally with your conclusions, but "fifty years
> as a pro" and you are able to claim the world economy has shrunk
> by 40%-50%??? Absurd exaggeration hardly serves any credibility
> you might be seeking.
Just letting the audience know that they might not want to expect to buy SPYs and hold them for 10 years and make a lot of money. Picking stocks will probably lead to substantial gains, but "alpha" isn't going to arrive automatically out of a V bottom.
Here's a link to the proposed budget. Much of the deficit results from tax reduction (tax receipts equal to 15.4% of GDP, historical low)
www.whitehouse.gov/omb...
Here's one that shows tax receipts and spending:
www.docstoc.com/docs/2...,
Deficit as a percentage of GDP hit a high of 30% in 1943, but was 23 and 27% in the other was years. The debt load didn't present an insurmountable burden to the Post War economy.
On Mar 15 08:46 AM Allan Frain wrote:
> Got any historical graphs showing economic recovery in the face of
> a Federal deficit that is 12.5% of GDP ?
We have a deflationary sprial not an inflationary spiral.
We rose over 14x from the high of 1966 while the high of 1966 was only 2.6 the high of 1929.
We had a young demographic growing into their prime in the 1970's while we now have no such demographic and those same baby boomers are exiting their peak earning years and will be consuming more than they produce and will also be removing what wealth they have left from the stock market over the next 20 years.
> This was (is?) a standard bear-market rally. Nothing fundamental
> has changed, the worthless are rising even faster than the high-quality
Very good points.
The rally once again is riding on the backs of very questionable leaders telling us that everything is under control. Things are not under control and the market is not finished with its revaluation.
Corporate earnings are dismal, housing is still on the decline and the consumer is fighting to stay alive. This is not me being bearish, these are the facts.
> into chaos, nor shall we in the forseeable future. The market is
> unlikely to have a sustainable rise until 2011 or 2012. My guess
> is that the SP500 will make many oscillations in the range between
> 600 and 900 for a long time to come, perhaps with brief excursions
> outside this range. The final break out upwards will
I imagine your range was 750-900 just a few weeks ago?
The Dow is headed to under 5,000 and the S&P will go below 500 this year.
Reasons:
1. The current P/E of the S&P 500 is over 40 if you use Q4 earnings (98% reported) while earnings continue to fall.
www2.standardandpoors....
2. Housing shows no signs of bottoming and prices continue to decline.
3. Demographics suggest that we have a long term downward pressure on stocks amd the economy for the next few decades.
4. As investors realize that the stock market doesn't always go up they are becoming more and more wary of it and this is likely to last for decades, as it has in the past.
5. CEO's and government leaders are still not acting with transparency and that is because they have a lot to hide. A LOT!
> - at present low prices should bring in steady dividends and gains
> when the tide of money waiting on the sidelines flows back in.
Foolish comments from someone who can't look beyond their investing lifetime.
There is no money waiting on the sidelines. That wealth is half what it used to be and the people who hold it don't want to lose any more.
Consider that if the stock market declines 90% as in the 1930's a 100% rally will get you back to 20% of where you started. But by that time you will probably have spent anything you had left on staying alive and it's unlikely that you will have anything left to throw at the stock market.
This is not a game. You need a strategy based on facts and your individual needs. Hope is not an investing strategy!
Anyone who thinks GREED won't come surging back again for many years is in for a surprise... markets have been, are and will always be bipolar, and suffer from a particularly unique but predictable alzheimers syndrome.
Here's the thing, the short side is as historically over-invested as it has ever been in 80 years, the market is just as historically divested, and cash is piled to the roof.
Taking that thought further, there are in fact 5 separate legs of the "short" trade here, what I have come to call cumulatively the Armageddon trade that was put on last Fall: short stocks/double short via ultra ETF's, long bonds, long gold, long volatility via VIX options, long cash via FDIC insured accounts, MM's, CD's etc.
Those are monstrously crowded trades. Let me repeat - monstrously crowded.
It wouldn't take much to tilt the balance and set off at least a short term squeeze of huge proportions- reintroduction of the uptick rule, re-evaluation of mark to market, something completely unseen and unknowable at this point... a "white swan event" in this black swan world.
The wise investor has proven time and time again over the years to be the one who doesn't take the crowded side of the trade, but rather the one who is early to the uncrowded side.
And in my three decades of watching the greatest show on Earth, I have never seen a more crowded short side bias in all its iterations. Never.
I don't know what that catalyst will be yet - perhaps what Bernanke suggested tonight - when private equity makes that first big equity buy in C or BAC.
Until then this market continues to provide great short term trading opportunities for the nimble and quick- just don't stay around after midnight.
Now assuming that the 2000 event was mild when compared to todays event, which by the way has been going only 1 year and 3 months, this leaves only one option, this bear market is far from over, and may well be the longest we have seen since the 1929 event.
The alternative scenario is that the worst bear market in a century is the fasted ever to recover.....and pigs might fly!
Freddyv, I think you are seriously under rated, I'm in complete agreement w/your posts.
The poster who basically said, never under estimate the power of greed, is right. This may be true of the Gambler. On the other hand the US Mkt's have been cushioned by 401K's & IRA's for many yrs. Boomers are turning 60 by the day & can not afford to gamble. If they are so Lucky as to have Full Time Employment w/a Retirement age of 65, many don't. Some may be fine, but many are already eating into their savings before they can qualify for SS...What happens later if they Bet Wrong? Hummm, Greed vs Fear-Better Something than Nothing.
Another has said there are too many on the short side, FDIC, MM, etc...Some people actually Need to be there, it is Logical for them b/c of their age. If you have 65K & that is what you have other than SS. Losing 30-40% or more over the past few mos is Not Good. People forgot security until recently. This is all Very different if you are 35 floating 500K & trading. I think this is actually good to see some of the Really Risk Intolerant people being conservative. I only give 2 examples but Big Money will & should always chase returns. Maybe we just started figuring out who we really were again? Smart is Conservative if you have little to work w/& Gambling is just that until the ticker turns. Many Investors are just like the 65K person I mentioned earlier, most.
Last, Amitabha interesting theory if you are 25, working w/12K. I like your idea of splitting up the capital & getting in slowly. On the other hand, the chances of C or BAC folding are low, yet as w/all restructuring, the Share Holder is Wiped Out. Many who hold gold won't sell until they see real recovery of the system, b/c it is not a trade but rather a store of wealth. Similar to R/E purchased inexpensively.
I wonder how doom and gloom the punters were back in late 1974? Probably also in depression mode looking for a double digit S&P500. Doesn't matter if it is inflationary or deflationary, all that matters is valuation overshoot. A drop to single digit P/Es is not that far away.