There is a growing fixed and inflexible point of view out there, an unwillingness to consider facts that don’t match scenarios concocted some time ago (most of them bearish, of course, but some bullish too). This is a dynamic system, and our path changes all the time based on participants’ actions … I’m simply pointing out that when the facts change in a dynamic system, most people should as well — even if the facts that changed aren’t the ones they have been ranting about. I wonder if the econoblogosphere is capable of doing that given its origins in dogged fixations centered on particular worldviews and outcomes.
Any of my regular readers understand that I am quite bearish. This is my backdrop view: that a secular change has occurred in the USA, and we will be in a long term bear trend, perhaps even a total collapse still to come. Below is an updated doomsday chart (log) from the 1932 low which summarizes very well my long term opinion. We will go back to “trend” (ala Japan), and see a severe decline into the 3000 range over the next 10+ years.
[click to enlarge all images]
But what if I am off my rocker and totally wrong?!? I managed to get a good call on the recent low to cover shorts (DOW Update - Take A Break Into 6500), but I missed this rally in a big way, and am in the midst of a short squeeze. So now, the million dollar question is: is it a bear market rally, or the beginning of something more? For example, Trader’s Narrative has a good case for a significant bear trap: Bear Trap Is Set - But Will It Close?. Am I missing a significant bottom? Well, let’s look at the current technical situation in light of some historic bottoms, and see where we might be, and what we might expect. Unfortunately we do not have many comparisons to look at, as the current bear market is just one of a few of this magnitude. With that being said, let’s get started.
Beginning with the most recent bear, the first comparison is to the decline from Jan 2000 to Oct 2002. This bear market lasted for 1004 days, dropping from 11749 to 7197, for a loss of -38.7%. The low of the bear tested and broke a prior chart low (1998 low), and resulted in a low ROC reading of -28.10. The market established a range (base) between 7197 - 9043 (25.6%) for 9 months before breaking higher. It took 1461 days until the market posted a new high in Oct 2006.
Next is the bear market from Jan 1973 to Dec 1974. This decline lasted for 699 days for a loss of -46.6%, falling from 1067 to 570. The low of the bear tested and broke a prior chart low (1970 low), and resulted in a low ROC reading of -33.04. The market established a range (base) between 540- 692 (21.4%) for 5 months before breaking higher. It took 2953 days until the market posted a new high in Jan 1983.
And the final comparison is to the big one, the 1929 crash. This mother of all bears witnessed a decline of 386.10 in Sep 1929, to a low of 40.60 in Jul 1932. The market lost an astounding -89.5% of its value over 1034 days. The low of the bear tested and broke a prior chart low (1921 low), and resulted in a low ROC reading of -86.52. The market established a range (base) between 40.60 - 81.40 (100%) for 12 months before breaking higher. It took 8158 days until the market posted a new high in Nov 1954.
So where are we now? As most of you are painfully aware, the DOW has declined from 14198 in Oct 2007, to a current low of 6469 this month, Mar 2009. Over the past 517 days, the market has lost -54.4%. The decline has tested and broke a prior chart low (2002 low), and resulted in a low ROC reading of -32.35. So now what ? As I stated earlier, we have only 3 comparisons to go by, but this exercise should add some value. This table summarizes the data from the prior 3 bears, and should allow for some sort of road map if we are at the lows.
The current bear lines up fairly well in an historical context with the prior three major bear markets. It certainly meets the sample magnitude % decline, but is shy in terms time (days) of decline. The current bear has tested and broken a prior chart low just like prior bears, and the long term ROC measure has registered a similar oversold condition. The market is ripe for a potential base. So if we have established a DOW low at 6469, we should expect the market to begin to base over the next 9 months in a very difficult fashion, establishing a range as large as 49% = range high in the 9650 area. This would allow for some back and filling, but if history is a decent guide, the base should be completed by December 2009.
So if you believe that the lows are in, then expect a range trade for the next 9 months between roughly 7000 - 9650. Use any meaningful sell-offs to accumulate stocks. This should be your maximum bullish expectations. The bad news is, we should not expect the DOW to return to new highs until sometime near April 2017 if the secular bull market remains intact.
In summary, I completed this exercise in an effort to satisfy my bearish brain that I have looked at everything objectively. Not sure if I am sold on a bottom, as I still believe that the financial system as we know it may truly be broken, and the events (Fed/Gov’t/Political) over the past 12 months has made for a completely different fundamental backdrop. Nonetheless, I do like the evidence presented here.
So I will suggest that if we establish a new range as discussed between 6500 - 9650 for the balance of the year, then use these boundaries as a major guide for what is in store for the long term. A break above the range and history does repeat, setting the stage for a new bull market. However, if we make a break to the downside to new lows, then my doomsday chart is correct, and we have yet to witness the worst.