Another Reason You Should Be on the Sidelines Now

How does the stock market rally since the March 9 low compare with the 1929-1932 bear market - which also included bank failures, bankruptcies, severe stock market declines, etc.?

For some perspective, Chart of the Day provided the graph below, illustrating the duration (calendar days) and magnitude (percentage gain) of all significant Dow Jones Industrial Index rallies during the 1929-1932 bear market (solid blue dots).

As the chart shows, the duration and magnitude of the March 2009 rally of the Dow (hollow blue dot labeled “you are here”) are longer than any that occurred during the 1929-1932 bear market. Add an ugly technical picture and stretched valuations, and it is not difficult to conclude that it is prudent to be on the sidelines at the moment.

Click to enlarge:

Source: Chart of the Day, October 30, 2009.

Comments

[TradingHelp...:]

You articles continue to be a must read.

I learn something everytime. Thanks.

Nov 01 04:49 AM

[bartpr:]

did not the 29 32 period end up with another bottom in 33. its too soon to say that the market has bottomed. when the cape of schiller (pe of the ten year ma of earnings of the snp) has yet to make any stabs below 13.8 . remember that all amjor bottoms of the last 100 years ended up with the cape down below 10. this could happen. too early yet to tell.

one big difference now and then is the massive gov stimulus tha that yet to feed the economy. only 25% of the stimulus has been active to date.

Nov 01 06:55 AM

[sequoiab:]

current market is similar to that in 1938, not 1929, while Nasdaq crash in 2000 may be more comparable to 1929. Our current long-term bear market started in 2000, not in 2007. That long-term depression was recovered by World War II, don't know how we are going to end this one.

Nov 01 08:26 AM

[David Van K...:]

To say we are in a long-term bear market since 2000 is pure conjecture, probably based on a 16-year market-cycle theory. The truth is, we don't know yet, and won't know for several years. The ubiquitous comparisons to 1929-1932 are all interesting, but if you read all the articles and comments (there have been hundreds), you can see that many people draw different conclusions from the comparisons. Just above this comment are two others that disagree as to the correct depression period to compare today to.

The fact is, we don't know, nobody can know the future. Comparisons to previous periods are just one of many factors that you may wish to take into account in making your investment decisions. But don't rely totally on any single one of them.

Nov 01 09:41 AM

[paxjds:]

Best to be on the sidelines with Gold in your possession. Some silver for pocket change will also prove to be very wise. We are in for a 15-20 year mess, and it started in 2007. The tech bubble of 01/02 was just a shot across the bow.
Do not buy gold or silver such as GLD or SLV as you are trading paper for gold/silver paper certificates. Paper = paper. Gold in hand is financial security, paper is just trash. In case you dont realize it, the $ dollar is becoming trash before our eyes. Lead bullets are also a fast rising commodity that will no doubt double or triple in value in 5 years along with S&W products.

Nov 01 10:43 AM

[adan:]

great chart / graphic, worth a few thousand words at least!

thanks!

Nov 01 05:29 PM

[untrusting ...:]

Good information by Prieur as always. Thank you.

We still believe that Doug Short's summary of PE10 ratios (Schiller information), is perhaps the best way of looking at the current recession and current market values. See the summary at the link below.

www.dshort.com/article...

Basically what this shows is that very serious recessions since approximately 1900-2009 in the US have NEVER had market bottoms until PE10 ratio's dipped below 10. Further Doug Short shows that moves from the highest PE10 quintitle (2007) have ALWAYS resulted in market bottoms eventually developing PE10 ratios of less than 10 in the lowest quintile. None of these conditions have yet been met in this market yet.

So unless one magically believes that it will be different this time from all previous times before, then one has to conclude the odds heavily favor that at least one more serious market downleg is somewhere out there in the future.

It doesn't mean one can't trade the market and make some great money as many have, but it certainly does raise big cautionary flags about the levels of the current rally and probabilities of much lower future market prices.

Nov 01 06:26 PM

[pdtor:]

All this technical analysis is great, and studying history can be informative, but in reality there is no great fundamentals for this bull rally other than none existent interest rates, and government spending. I concur good time to be on the sidelines

Nov 02 09:00 AM

[jse17:]

I too enjoy PDP’s articles but …… If one uses “technicals” at all, comparing charts from 80 years in the distant past to the current market environment is much like evaluating the weather forecast from that era as a marker for tomorrow.

The wondrous and talented Sir John Templeton said, “I never knew an investor that consistently made money applying technical analysis. For those that respect and adhere to the technical school, I wish you the best but “C’mon man (or lady)” an 80 year gap in events is beyond a reasonable reach!


On Nov 01 04:49 AM TradingHelpDesk wrote:

> You articles continue to be a must read.
>
> I learn something everytime. Thanks.

Nov 03 08:01 PM