Where Are We in the Stock Market Cycle?

My January 6, 2008 article on the PiedmontHudson Blog pointed out we had just traced out a head and shoulders top pattern. Since the support level discussed in that article has been clearly penetrated, it’s time for an update.

The graph below shows the performance of the Dow Jones Industrial Average (DJIA) for the past 15 years.

Support level 1, defined by the market lows of 2004 1nd 2005, has been decisively penetrated. This level, near 10,000 should now be considered a resistance level.

Support level 2, defined by the market lows of 1997 and 2002, is around 7500. That region would produce a drop of 45-50% from the October, 2007 top. We are currently approximately 3/4 of the way there.

The average for all 33 primary bear markets since 1900 has been a loss of 37%. As I write this, the DJIA is 36% below the top. Basically we have reached the average primary bear market loss with no bottom in sight. The average of the five secular bear markets since 1900 has been a loss of 54%. At support level 2 we would be near the average for a secular bull market bottom.

What if we are going to the third super cycle bottom since 1900? Support level 3 (lows of 1993 and 1994) represents a loss of 75% from the top. There are two other support levels from the past 21 years not shown on the graph (around 2300 based on 1990 lows and just below 1800, based on the 1987 bottom). These two support levels would represent losses from the top of 83% and 87%.

The two super cycle lows since 1900 occurred in 1932 (89% below the top) and in 1974 (45% below the top).

These are strictly technical comments. I will not discuss fundamental analysis here, but I have seen little discussion by others to convince me that the fundamentals of a bottom are near. I am referring to PE ratios, visibility of forward earnings, credibility of balance sheets, etc. Overriding all these factors is the very survival of our financial system as it has existed for the past 60 years.

To offer some tidbits for the nimble investor, many severe bear markets are punctuated by violent rallies of short duration. These are difficult to predict but do offer some trading opportunities with proper loss safeguards.   

Comments

[Smarty_Pants:]

"Where Are We in the Stock Market Cycle?"

We are in the part where the general market plunges to new multi-year lows. Soon to be followed by the part where gold makes new all time highs as the dollar approaches a value we'd rather not contemplate.

2008 Oct 09 04:10 PM

[a believer:]

Good article. A rule of thumb is that markets tend to retrace 50% before a countertrend rally which would take us to Support 2. But if you look at NAS 100 after the 2000 crash, it dropped about 85% before recovering which takes us somewhere south of Support 3.

I'd say this is alot more like the NAS 100 bubble, and probably alot worse.

So, nothing worth betting real money on here. Stay in cash (or gold).

2008 Oct 09 08:32 PM

[bearfund:]

Smarty_Pants, why would we rather not contemplate it? We're not holding dollars, are we? Surely not... everyone with a clue is storing his wealth in gold by now.

2008 Oct 10 12:27 AM

[George Gorski:]

I use the 1/4 rule. A retailer generally relies on buying a commodity for 1/4 of the selling price, 1/4 is the costs, 1/4 is profit and 1/4 is growth. When the resource based market share price reaches 1/2 of the 52 week high, I consider it is at cost and a good time to think about buying, anything below 1/3 is a buy and less than 1/4 is a steal. The only thing that will lower these ratios is if the number of consumers compared to 52 weeks ago changes to the downside. I believe 1/4 of the 52 week low is bottom, if the number of consumers remains the same.
George

2008 Oct 11 11:31 AM

[Diabolo:]

the nasdaq bubble was different, as PER were above 100 for most of them - stick to the fundamentals...
we've seen a capitulation, now liquidation - the time to buy is coming coon, if it hasnt already come...
a higher low has already been set.. from 7750 to 7966 today...
if u so much interested in history, check out historical PEs

2008 Nov 13 07:22 PM