Dow Target 6,617, October 25, 2009: Here Is Why 59 comments
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History may not repeat itself, but it does rhyme. I have been in the camp that this is a bear market rally. That is what I thought we would be getting in March. I'm also in the camp that because of the need to deleverage debt in most of the developed world, we will likely be heading into a global economic depression and perhaps at worse case, a collapse in the banking system.
I took a look at the bear market rally of 1930 and have found many similarities to our current bear market rally. Here is a chart from MSN money of the Dow Jones Industrial Average from November 1929 to October of 1932.
click to enlarge
The Chart begins at the beginning of November, 1929, just before the bear market rally began. It began on November 12, 1929 and lasted until April 16th, 1930, for exactly 157 days. The rally had a gain of 42.85% from low to high.
Notice the RSI, which is on a daily format. It began at 20 in the beginning of the rally and went up to over 60 before pulling back a little and then heading over 70, at which point, it was overdone and ready for a pull back.
The pullback then lasted 81 days and experienced a decline of nearly 29%. This was from April 17th - June 24th of 1930. The chart shows the declines and rallies that occurred the following year and a half, at which point the Dow fell 89% from its peak.
Here is what the chart of our current bear market rally looks.
As I mentioned before, the bear market rally of 1930 lasted 157 days and had a gain of 42.85%. Our bear market rally today is now up for 152 days since bottoming on March 6th and has a gain of 44.07%.
What I'm finding very interesting and what also shows considerable similarity is the RSI. Here it again started at 20 in March and went up over 60 in May before pulling back in July and then running up over 70.
I nearly just repeated my observation of the RSI during the bear market rally of 1930. The duration and extent is also so very similar.
I can imagine back in March and April of 1930, the retail investors were beginning to call their brokers telling them to BUY BUY BUY, get me back in the market now that it's going up again. They wanted to make back what they lost in the initial crash.
Some notable quotes from those months include:
"The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."
- Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930
"... the outlook continues favorable..."
- Harvard Economic Society Mar 29, 1930
"... the outlook is favorable..."
- Harvard Economic Society Apr 19, 1930
This is nearly exactly what's happening today. Investors are calling their brokers or advisors and asking to get in and participate in this market rally. Money managers are sweating about missing the gains as well and might be buying for the sake of buying just to participate in case the market continues to rally.
In March, Federal Reserve Chairman Ben Bernanke suggested seeing green shoots right at the beginning of the market rally. In June, CNBC show host Dennis Kneale declared the recession is over. Let's be honest, our economy is getting worse and as far as waiting for the economy to come back, my question is "what economy?" The manufacturing company I used to work for as an Engineer that employed nearly 4000 American workers is gone. It went out of business in 2006 and its not coming back. America cannot compete with "Free Trade" and credit may not even be available to start up again.
I also believe earnings estimates are way too optimistic. Internet retailer Amazon (AMZN) has annual earnings growth estimates of 22% for the next 5 years. How a retailer is going to grow earnings 22% over the next 5 years when unemployment continues to rise and incomes continue to fall is going to be a challange. The current share price puts AMZN's P/E at 56 making it quite expensive in my opinion.
There may be something about 4 - 5 months after a major low gets put in place that the retail investor gains the confidence to go back into the stock markets. AAII investor sentiment has 47% of their members bullish as of last Wednesday, which is the highest since this bear market rally began. Unfortunately, they are too late to the party in my opinion, just like they were in April of 1930.
If today happened to be the top of this bear market rally and history "rhymes" again, then 81 days from now, Oct. 25, 2009, the Dow would be 6,617 if it were to fall 29% from it's high it reached today at 9,321.
Disclosure: Short AMZN for clients and self and I own DXD for clients and self as a hedge in case this turns out to be right.
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This article has 59 comments:
How do you explain existing home sales on the rise, ISM index approaching 50, etc. While I see no gangbusters economy yet, but it does not look like the whole market move is a hoax, there are some hints of recovery. Check out how the cash for clunkers is working for auto sales-what about pick up in sales of base metals...
Overhanging debt, deflationary real estate prices and declining tax revenues, among other things, will prevent efforts at recovery from gaining traction. This is not an ordinary business recession.
Overhanging debt, deflationary real estate prices and declining tax revenues, among other things, will prevent efforts at recovery from gaining traction. This is not an ordinary business recession.
However, I think the catalyst will be corporate defaults. If you look at the past two recessions, equity prices bottomed right around the same time corporate default rates peaked. I believe that default rates are not even close to peaking yet...it will probably be in Q1 or Q2 of 2010...
I just wrote an article on the topic if you are interested in the details:
consequencesunintended...
For every yin....a yang I suppose.....
If both charts look similar,than the RSIs can't look different,since the RSI is calculated solely based on the chart data and doesn't contain any additional or different information.
www.zerohedge.com/arti...
On Aug 05 09:05 AM Obi-Wan wrote:
> It's interesting that you say 'earnings estimates are way too optimistic'
> when there's a stampede of folks yelling that the reason some 77%
> of companies BEAT expections this quarter was becasue they were too
> conservative.....
>
> For every yin....a yang I suppose.....
research.stlouisfed.or...[1][id]=DGORDER&s[...
3.bp.blogspot.com/_pMs...
On Aug 05 08:40 AM Roger Knights wrote:
> "How do you explain existing home sales on the rise, ISM index approaching
> 50, etc. "
>
> Overhanging debt, deflationary real estate prices and declining tax
> revenues, among other things, will prevent efforts at recovery from
> gaining traction. This is not an ordinary business recession.
The market is influenced by macro and micro economics (supply and demand, buyers and sellers)
I'd say mass psycology is influenced by the market directions, not the other way around.
On Aug 05 08:24 AM David Braunstein wrote:
> I liked your article. I read the above comments, too. One comment
> about the economy being different and the conclusion that the market
> will have a different result may not be all that important. The market
> is more influenced by mass psycology than any other factor. That
> is why your article and the one I wrote in June simply must be taken
> seriously. If you haven't read my article, you will enjoy it: seekingalpha.com/artic...
On Aug 05 09:27 AM David Van Knapp wrote:
> Well-reasoned comparison. I agree that history rhymes. That's why
> the failure to consider the elephant in the room--government intervention--makes
> the chart comparisons of historical interest only. The actions of
> the government in 1930 could hardly be more different from the actions
> of 2009. The fact is, we don't know what the outcome of all of the
> government programs will be 1, 3, and 5 years down the road. We've
> never been down this road before.
In reality, those stupid statistics aren't going to help me sell my place any sooner.
Can I also add that the 8K first time buyer incentive and cash for clunkers incentives are really bad ideas? What they are basically doing are putting people in MORE DEBT. Bad idea.
Why not give the unemployed people jobs fixing bridges or potholes cleaning up our city!?
But we sure as hell, are in for an interesting time!
The economy and the market are intertwined, connected at the hip and if they were both viewed in the same way one views a stock in fundamental and or technical terms nobody would own them long term, that being said nothing I have just said matters because neither are equities so fundamentals and technicals do not apply, tarot cards, we-gee boards, tea leaves and oracles are what one needs.
On Aug 05 08:09 AM RSAAKS wrote:
> The author states.."Let's be honest, our economy is getting worse
> and as far as waiting for the economy to come back, my question is
> "what economy?"
> How do you explain existing home sales on the rise, ISM index approaching
> 50, etc. While I see no gangbusters economy yet, but it does not
> look like the whole market move is a hoax, there are some hints of
> recovery. Check out how the cash for clunkers is working for auto
> sales-what about pick up in sales of base metals...
On Aug 05 09:46 AM TLassen wrote:
> I'd say historical comparisons of charts without understanding the
> actions taken by Governments in '30 and today are completely different
> could lead to wrong conclusions.
> The market is influenced by macro and micro economics (supply and
> demand, buyers and sellers)
> I'd say mass psycology is influenced by the market directions, not
> the other way around.
>
> On Aug 05 08:24 AM David Braunstein wrote:
It is foolish to be short when the printing presses are running.
For now, the market will follow the herd mentality and continue higher until the retail investors are all in.
The FED printing money will eventually lead to a blowoff top just like it did in 1999. Crushing debt, high unemployment, rampent inflation will follow. Municipal governements around the country are struggling to make their debt payments now. Wait unil the rate resets start in 2014 on the commercial RE market.
Investors are chasing return in the hope of gaining back staggering losses. When the tide turns, they will panic and not want to lose again. That may exasperate the power of the move down.
Cash for clunkers is a joke. Another ploy to help save a dying auto industry. Not because they can't innovate, because the refuse to do so. Foreign automakers are years ahead of them. They had their chance and blew it.
Banks/Brokerages and institutional investors have all been bailed out with YOUR tax money. Top execs win. You lose. Did you get a bailout? How is that home price fairing? You can't foreclose on your bank but they will surely go after you. Your tax money saves them and they foreclose on you with what's left. NICE!!!!!
At $11Trillion and rising, our national debt is becoming an enormous burden on our society and future generations. You work hard to send your tax money to china, russia, other countries????? Stupid. They in return send us inferior products and toxic toys. GREAT..
Add it up. Crushing debt, rising unemployment, crumbling infrastructure, commercial defaults, foreclosures, credit card defaults, socialistic new government, bankrupt medicaid,medicare, social security and aging population without retirement savings. Sure the market will rally with $4 trillion on the sidelines. Trouble is, nobody rings the bell at the top.
On Aug 05 09:52 AM The EconomicJoker wrote:
> Home sales on the rise? My house has been on the market since march
> and is priced below appraised value. I've had 5 total showings. There
> is no traffic, no loans..
>
> In reality, those stupid statistics aren't going to help me sell
> my place any sooner.
>
> Can I also add that the 8K first time buyer incentive and cash for
> clunkers incentives are really bad ideas? What they are basically
> doing are putting people in MORE DEBT. Bad idea.
> Why not give the unemployed people jobs fixing bridges or potholes
> cleaning up our city!?
>
The simple fact is that monetary policy during the early 1930s was an abject failure, forcing the economy into the depths of a deflationary depression. This is a lesson that Bernanke has well learned, as has every other economist worth his salt.
On Aug 05 10:48 AM TWS Investments wrote:
> The market will not see lows again in nominal terms. When the government
> turns on the printing press, asset prices inflate. And, in this
> case, inflate dramatically. In real terms, you may be right, but
> don't expect the charts to tell you where we will be as the Fed destroys
> the dollar.
>
> It is foolish to be short when the printing presses are running.
On Aug 05 12:53 PM Jason Tillberg wrote:
> I'm also long Gold and Silver.
The whole point of "less bad" is that at some point in the near future we will reach a break even point where things are not getting worse. Companies can learn to survive and adapt on 2nd quarter level earnings for an extended period. We don't even need growth for the stock market to reflect a value significantly higher than 6,617. This overhang of debt and unemployment is not the end of the world, we are in a recession after all. Also, do you think that even the bozos in Washington are ignorant enough to think that we can keep funding trillion+ dollar deficits every year? No, you will see the budget moderated by NECESSITY.
Was the point of this article for publicity? I'm trying to keep an open mind, but this would indeed by history repeating itself.
On Aug 05 09:46 AM TLassen wrote:
> I'd say historical comparisons of charts without understanding the
> actions taken by Governments in '30 and today are completely different
> could lead to wrong conclusions.
> The market is influenced by macro and micro economics (supply and
> demand, buyers and sellers)
> I'd say mass psycology is influenced by the market directions, not
> the other way around.
>
> On Aug 05 08:24 AM David Braunstein wrote:
On Aug 05 11:51 AM Vox Rationalis wrote:
> Any discussion of today and the 1930s can reach no meaningful conclusions
> without a comparison of macroeconomics - specifically the monetary
> environments.
>
> The simple fact is that monetary policy during the early 1930s was
> an abject failure, forcing the economy into the depths of a deflationary
> depression. This is a lesson that Bernanke has well learned, as
> has every other economist worth his salt.
Don't know about the market, but the effect it would have on the economy would probably be about the same as the effect on me -- deeper depression.
On Aug 05 02:39 PM Larry House wrote:
> Whatever the market does, it won't be predictable. It is just not
> possible to put two charts together and say this is what is going
> to happen and when. Has the market taught us nothing?
On Aug 05 05:05 PM wtp wrote:
> " . . . I hear L. Summers really really wants the job and Obama really
> really likes Summers, what affect do you think that would have on
> the market."
> Don't know about the market, but the effect it would have on the
> economy would probably be about the same as the effect on me -- deeper
> depression.
History always repeats itself......I wonder,,,,I wonder,,,,,
Tech boom peaked in 2008 when 90% of households now have internet and cell phones.
Just today CSCO Chairman Chambers said economy still bad. Their revenues are down 18% from a year ago in light of MASSIVE stimulous. What does that tell you?
Baby Boomers demographic has move beyond peak spending years in 2008 as well. They are now SAVERS and will be risk adverse.
This is not much different to the generation of the 20's when by 1928, nearly 90% of households owned a car and had radios.
De leverage or join the ranks of now 34 Million Americans getting food stamps. (That's only reason why we don't have bread lines stretching miles in major cities in America today)
Judging from this one statement, everything you write is suspect, simply because you are find a depression (which most people frankly can't even imagine) to be a certainty. My skepticism increases along with the writer's certainty regarding future events.
"Tech boom peaked in 2008 when 90% of households now have internet and cell phones."
So you believe there can be no future increase in "tech" spending. Brilliant.
"Just today CSCO Chairman Chambers said economy still bad. Their revenues are down 18% from a year ago in light of MASSIVE stimulous. What does that tell you?"
1. Chambers is FAMOUSLY cautious. Look into it.
2. The economy IS still bad. Is it as bad as it was 6 months ago? Not even close.
3. Business IT spending is down. What a surprise, during a deep recession.
"Baby Boomers demographic has move beyond peak spending years in 2008 as well. They are now SAVERS and will be risk adverse."
So you think that retirees are net savers. Is anybody else paying attention to this nonsense?
"This is not much different to the generation of the 20's when by 1928, nearly 90% of households owned a car and had radios."
This is your big equivalence? Really?
"De leverage (sic) or join the ranks of now 34 Million Americans getting food stamps."
Be specific - how much debt do you think I can have and still avoid going on the dole?
Here is an interesting projection of the time it takes for the stock market to recover following a bear of this magnitude.
dshort.com/articles/20...
"Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened." -Churchill
You can lead a horse to water, but you can't make him drink. The truth you are serving up here is not the kind of Kool-Aid they crave.
---AKA sober realist
Sober Realist touched on something that harkens back to the Great Depression. The following article, one of the best I've read recently, explains it:
www.dailykos.com/story...
On Aug 05 09:00 PM Sober Realist wrote:
> For those that do have jobs in America, are wages for the middle
> class increasing? What has been the trend been for the last 3 decades.
> Same question goes for China. You ain't seen nothing yet.
On Aug 05 10:57 AM David Zanoni wrote:
> It's doubtful that your prediction will come true. We're seeing signs
> of improving macroeconomics (although slow, they are improving).
> Although I do expect a healthy pullback in the stock market of no
> more than 10%, I don't see your Dow 6617 happening. It sounds like
> you just needed to vent your frustrations. I'm sorry that you faced
> a job loss. Take heart - many jobs will be created in technology,
> and healthcare, and eventually the rest of the marketplace.
On Aug 05 11:51 AM Vox Rationalis wrote:
> Any discussion of today and the 1930s can reach no meaningful conclusions
> without a comparison of macroeconomics - specifically the monetary
> environments.
>
> The simple fact is that monetary policy during the early 1930s was
> an abject failure, forcing the economy into the depths of a deflationary
> depression. This is a lesson that Bernanke has well learned, as has
> every other economist worth his salt.
On Aug 05 10:14 PM Vox Rationalis wrote:
> "Judging by most comments, many are in denial that we are headed
> for a depression in 2010-2012."
>
> Judging from this one statement, everything you write is suspect,
> simply because you are find a depression (which most people frankly
> can't even imagine) to be a certainty. My skepticism increases along
> with the writer's certainty regarding future events.
>
> "Tech boom peaked in 2008 when 90% of households now have internet
> and cell phones."
>
> So you believe there can be no future increase in "tech" spending.
> Brilliant.
>
> "Just today CSCO Chairman Chambers said economy still bad. Their
> revenues are down 18% from a year ago in light of MASSIVE stimulous.
> What does that tell you?"
>
> 1. Chambers is FAMOUSLY cautious. Look into it.
>
> 2. The economy IS still bad. Is it as bad as it was 6 months ago?
> Not even close.
>
> 3. Business IT spending is down. What a surprise, during a deep recession.
>
>
> "Baby Boomers demographic has move beyond peak spending years in
> 2008 as well. They are now SAVERS and will be risk adverse."
>
> So you think that retirees are net savers. Is anybody else paying
> attention to this nonsense?
>
> "This is not much different to the generation of the 20's when by
> 1928, nearly 90% of households owned a car and had radios."
>
> This is your big equivalence? Really?
>
> "De leverage (sic) or join the ranks of now 34 Million Americans
> getting food stamps."
>
> Be specific - how much debt do you think I can have and still avoid
> going on the dole?
The reality seems to be that when some people have experienced bad personal economic events, they project their negativity to all others and out into the future, as far as they can see. History suggests that this isn't a productive view.
Here's a chart showing the current rally overlaying the 1930 rally.
www.businessinsider.co...
On Aug 05 08:03 AM chap08 wrote:
> Don't expect the stock market to rhyme when the policy response did
> not. Whatever you think of the actions taken, they are atleast positive
> for the stock market (unlike the 1930s). Yes, the market may leg
> down again, but all these comparisons with the past will not tell
> you how or when.
I'll remember to repost this when the bears are complaining how earnings are beating such a "low bar".
The last time they were 50% or more bullish was in May of 2008 when the Dow was 13,000.
What does that tell you about the euphoria at 9260?
> AAII listed its results of its investor sentiment survey. 50% Bullish.
> The last time they were 50% or more bullish was in May of 2008 when
> the Dow was 13,000.
> What does that tell you about the euphoria at 9260?
The answer is quite obvious: absolutely nothing.
On Aug 06 06:02 PM Vox Rationalis wrote:
>
The answer is quite obvious: absolutely nothing.
On Aug 05 09:05 AM Obi-Wan wrote:
> It's interesting that you say 'earnings estimates are way too optimistic'
> when there's a stampede of folks yelling that the reason some 77%
> of companies BEAT expections this quarter was becasue they were too
> conservative.....
>
> For every yin....a yang I suppose.....
There are so many comments where the author is grasping the elephant's tail or leg or head and declaring the shape of the entire beast without acknowledging there is so much that they have not included in their assessment.
Obi-Wan, Earnings and Earnings Expectations are simply a shell and shill game. As the quarter goes by Earnings expectations get ratcheted down by company guidance to a level below what the company can meet so the comment that "77% of companies BEAT expections this quarter" is of little import except that said companies guided analyst to a correct assessment of where their earnings were going to come out. Fluff and Lies. Then the market rally's on this mirage drawing more money from the middle class into the pockets of big money.
So many comments to debunk . . . so much is different now from the 30's is very true BUT human psychology and market psychology are the same. We had a massive crash last fall and since then we have retraced over 38.2% (Fibonacci level) and may even rise to a 50% retrace of that drop but the problems we had going into last fall's drop have not been solved and the excesses we had have not been rectified. there is much more work on the downside to come.
Did you really think the appropriate response to too much credit is . . . . more credit? Bernanke is basing his reaction to today's calamity in a totally fiat based economic system (US astronomically in debt) on what was done in Gold and Silver based monetary system (US creditor nation)? Sorry people I wouldn't get my hopes to high that all the right moves are being made. Today's economy is so much more complex than in days gone by but chart action, market psychology and the mathematics of natural phenomena still resonate as they always have.
Did you think the market could work out all of it's imbalances in 6 months? Especially when the smartest minds, most powerful groups (banksters, Presidents, Congress etc) all are doing everything they can to avoid doing what must be done and experiencing what must experienced ? No. But the reality of the damage done, the excesses taken on, the corruption embraced etc will come to the forefront once again . . . . and that right soon.
Quasi Yoda had to answer young Obi-Wan
he lays out some comparisons between four bear market periods concluding the 30s decline is most similar in chart patterns.
A fascinating exposition but to what end?
i dont see the value of this exercise. A fundamental tenet of trading
is to not to anticipate the anticipators. Give it up and focus on the business of making money or preserving it which ever way the market chooses to unfold.!!!
I BELIEVE MANY AMERICANS HAVE BEEN FLEECED BIG TIME. BANKS ARE NOT SO EASILY LENDING TO BUYERS ACROSS AMERICA, AND UNTIL THEY GO AFTER THE CROOKS, RESEARCH FIRMS AND ORGANIZATIONS THAT CHANNEL THE MONEY GIVEN TO THEM TO THEIR POCKETS, WE WILL CONTINUE TO BE SNOW JOBED. CONGRESS, CZARS, AND THE LEFT WING SOCIALIST PRESIDENT(OBAMA) WILL CAUSE A MAJOR DEPRESSION FOR SURE.
IT IS NOT A ROSEY ECONOMY WITH GREEN SHOOTS AND EVERYONE LIVES HAPPILY EVER AFTER, RATHER A COLLAPSE IS EVIDENT SOON!