mrresponsible

Glimmers of Hope Amid Market Doom and Gloom

STOCK MARKET DECLINES, RECESSIONS, RECOVERIES & CHARACTERISTICS
Stock Market Declines
The U.S. stock market peak in this cycle could be defined as October 2007
On average, the U.S. stock market peak to trough is 10-22 months in length. (On average, with the current official declared recession beginning December 2007,
the recession trough would likely be before September, 2009. On average, markets should bottom between April & Sept., 2009
U.S. stock market bottoming process: has been 3-8 months in length since 1970. April to October, 2009.
The total time spent in bear markets has been 31% of the last 107 years.
Risk aversion
Since 1953 the S&P stock market index bottomed 4.1 months prior to recession trough.
Recessions are almost always preceded by:
a) a significant rise in the real funds rate (i.e., an overt tightening of monetary policy), and
b) a significant flattening of the yield curve (which typically confirms that money is tight).
Consumer expectations falling
Industrial Production falling
Interest rates peaking
Yield curve is inverted


Stock Market Recessions
Official Current Recession Declared by National Bureau of Economic Research: Beginning December 2007
Historically, the length of recessions have been:
17 months in length since 1854
14.4 months since 1902 - Average stock market decline -24.2%
22 months since 1929
10.2 months since 1945 - Average stock market decline 34%
During a couple of bear stock markets, no recessions were ever declared.
Consumer Expectations reviving
Industrial production bottoming
Interest Rates falling.
Yield Curve is normal.
Stock Market Recoveries
Stocks and sectors provide some leadership - solid sales and earning growth and the stocks are traded well
U.S. stock Bull markets (from trough/bottom to stock market peak) have averaged 30 months in length since 1900
There have been three long bull markets that lasted 9 years, 10 years, and 15 years 8 months
An average gain of 106% for all bull cycles
An average gain of 46% after one year from the recession trough. If it is a time when all others are fearful, maybe it is time to buy.
Broadening markets (small, mid, and large cap stocks going higher)
Margin debt as a percentage of GDP reaching the historic low range that corresponds to bottoms.
Insiders buying.
Credit flows
The VIX Volatility Index falling
Risk appetite expansion
Early Recovery
Consumer Expectation rising
Industrial Production rising
Interest Rates bottoming
Yield Curve is steep
Recovery
Consumer Expectations decling
Industrial Production is flat
Interest rates are rising
Yield curve is flattening
Sequential Characteristics of Declines, Bottoms, and Recoveries
Concern - Decline of market over long period of time
Fear - Rapid acceleration in the speed of the market fall
Panic - Massive increases in volume and volatility - like convulsive seizures
when 14 of the 64 days where intraday volatility is 8%+ ... going back to 1928.
So out of 80 years, over 20% of the most volatile days have come since October 2008
Shake-out - speculators - everyone gives up - no one is saying it is a great time to buy
Capitulation - You won't know it when you see it.
The idea of capitulation could be costly as investors wait for a bus that never arrives -
best if you are a long term investor 5-10 years
Geniuses are gone
NBER declares recession is here
"Acceptance" stage of grief
Oversold conditions
Market does not go down on bad news: Trust Building/Hope
Stock market volumes are low after a bottom.
Recovery
Average 1 year return after trough/bottom = 46%
Bounces off the bottom can be dramatic.
1973-75: Stocks up 80% within a year.
1982: Stocks up 65% within two years.
1990: Stocks up 60% in next three years; up 200% by 1998.
2002: Dow up in 2003.