Thursday, March 19, 2009
Monday, March 16, 2009
Taking an even longer historic view, if one goes back to the 1930s time period for the Dow Jones Industrial Average, the annual equivalent rate of return over about 80 years is in-the-order-of 3 percent to 6 percent per year. The 3-6 % spread comes from using peaks or lows at both ends. These numbers suggest that the longer one is invested, the more likely they are to see lower returns of rate.
At the other end of the rate spectrum, consider the market rally over the last 10 calendar days. The media has been focusing on how the markets have risen for the last 5 trading days. This rally has produced a very impressive short-term rate of return.
The SP500 Index rose from a low of 667 on March 6 to a high today of 774. This was a point gain of 107 points over the starting level of 667. A total gain of 16 percent over 10 calendar days. This is equivalent to an annual gain of 584 percent per day. The two ends of this spectrum are 3 percent and 580 percent. Interesting numbers here.
Based on nothing more than the 500 % + unsustainable rate of return recently we should not be surprised to see the markets drop significantly over the next few days.
For anyone familar with statistical probability, ask yourself what are the odds that someone could have predicted this rally, on the day it began, if the stock market is really just a random walk. I know it is not an impossibility with a random walk but keep in mind here that I do not make a lot of these forecasts. I am not a roulette wheel being spun 7 days per week for years on end. Its quite a different situation. Very few trials here.
As I monitor this rally and ponder my trading decisions I am now trying to see where this rally might end, in terms of it's upper extreme limit. Strong rallies like this one are always temporary, at least in the short-term.
The end of a bear rally, if I am correct in this longer-term expectation, is always harder to call than the start of the rally. My crystal ball is not that clear. A degree of uncertainty is something one must always live with when forecasting the market. The degree of uncertainty varies over time.
There are several possible upper limits, the closest one being near 810. As always, the market will decide if this limit is the most appropriate or not. It all depends upon how much bullishness remains out there in stock market land.
Sunday, March 15, 2009
The undeniable market history, coupled with the severity of the current bear market, is forcing the financial advisors closer and closer to seeing how the market really works. I expect a lot of them are reviewing and rethinking what they were taught in financial advisor seminars etc. I also expect that the majority of them are also taking a big hit on their personal finances.
It will be interesting to see what their literature says a few years from now.
Wednesday, March 11, 2009
Monday, March 9, 2009
I calculated the annual equivalent compound return for the Dow Jones Industrial Average from the low of 41 in 1932 (after the 1929 crash) to the most recent low of 6440 in 2009. It comes to about 6.75 percent compounded over 77 years. In other words, $1 would have appeared to have increased to $157 dollars.
The starting point and ending point of these types of calculations will make a relatively large difference. For example, if I use the 1992 peak of 381 and compare it to the 6,440 low in 2009 I get a an apparent annual compound return of only 3.75 percent. Yikes...put my money in saving bonds!
However, we should view this apparent increase as "an illusion" due to the effects of inflation over the last 80 years. We know that $1 in 1929 or 1932 bought a lot more "things" than $1 buys today in 2009.
If we subtract inflation from the stock market long term increase then prices may not have really gone up at all.
Another thing that occurs with a stock index is that stocks that drop in price below a certain minimum threshold value are periodically culled from the index and replaced with the lastest hot stocks. That's a little like dead people in a study group being placed with new live ones. This factor may also contribute to the apparent increase in the index over time. The real market increase may be lower than what the indexes suggest. The index was never designed to model the growth in the stock market.
With a random walk, we can say that if one waits long enough the true value of the DJIA can be expected to return to the starting point from time to time.
The current bear market may be just that...a "run" of values that happens by chance to be moving the markets back closer to the starting point.
And, Black Swans may just be the market randomly heading back to the starting point as should be expected with a random walk.
The problem I have with all of this is that I have called so many turns that even if the numbers, on their own, fit well into a statistical distribution, one having the appearance of a random walk, I have seen too much evidence to the contrary to believe it.
However, I can understand how others with less knowledge could come to that conclusion. That conclusion on their part would be perfectly logical. I guess, in a sense, good market predictions to those people would be just another Black Swan.
Sunday, March 8, 2009
Friday, March 6, 2009
The interesting thing about this is that my analysis allows me to see "the possibility" of a relatively important market turn as it occurs. Only Elliott allows one to see this sort of thing.
Time will tell if the market has started a sideways or rally pattern. The market always has the option of going deeper still before it makes the next rally. In any event it appears to be due for a somewhat larger rally at this time.
Thursday, March 5, 2009
This morning that little 2 day bull trap closed and the SP500 made a new low.
It is also worth noting that another example of a bull trap closing occurred today on the Canadian side of the boarder. Canadian National Railways Company (CNR on TSX exchange) has finished a sideways move that began back on November 21. At that time the low was $38.9. The price has dropped to $38.5 so far today.
These "technical events" are measurable scientific evidence that the bear market is alive and well and that the best bet these days is for lower lows.
These breakouts to new lows do not tell us where and when the bear bottom will occur but they do warn us that the bottom will occur somewhere in the future at some lower level.
Tuesday, March 3, 2009
Saturday, February 28, 2009
The Canadian TSX Composite Index is teetering on the edge of doing the same thing. On February 24th it went below its November low during mid-day trading. So there is little hope that Canada will avoid more downside as well.
We should expect the bear market to retrace something more than the ~50 percent loss to date. This bear market is now officially the second largest market loss since 1929-1932 (-89%).
Thursday, February 26, 2009
Wednesday, February 25, 2009
All the major North American stock indexes have either broken below their November lows or they are within a hair's breadth of doing so. The Nasdaq is the index that has the farthest to drop before that happens. It makes me wonder why.
Apple Computer's reluctance to join the next stage of the bear market appears to be one of the reasons for the Nasdaq Index having the farthest to fall. Even Microsoft has had the decency to join the bear party and break it's Nov. low. And, Microsoft has recently warned that their business will suffer during the bear market. Make perfect business sense to me...new computers and the latest software are, in many cases, a luxury that individuals and businesses can postpone to save money. I would guess that Apple Computer will also see lower earnings with the drop in PC sales.
I still think the Apple will fall and we will see a large drop in the price. Based on what the rest of the market has done recently I don't expect we have long to wait before Apple breaks its November low. If that happens, as the Apple falls it will help bring the Nasdaq and other indexes to lower levels.
Monday, February 23, 2009
However, there is another worse case scenario we should keep in mind. It is the possibility of a long duration, more or less sideways bear market, similar to the 1968 to 1983 time period. A lump sum held in the stock market through that entire 15 year period would have earned 0 percent in capital gains.
In fact, we may already be in one of those sideways market periods. It may have begun back in 2000. More so for the US than in Canada. Many stocks started their bear in 2000. Those stocks have already been in a bear market for the last 9 years.
In the short term, I continue to see a high probability of at least some additional downside below the November lows for all N.A. indexes. Likely world wide.
My expectation is based in part on the fact that the DJIA, the DJTA and the TSX Capped Financials and the TSX 60 (as of today) Indexes have all broken below their November lows. In short, we have an abundance of evidence to demonstrate the Dow Theory Trend Continuation signal has been given loud and clear.
Some people continue to hope for a large bear rally at this time. Unfortunately I see little opportunity for this to happen. In fact, a large bear rally may not even happen during this bear market if it goes much deeper. That pattern is only one possible bear scenario...one leg down one leg up then a final leg down.
If a bear rally does occur, I see it starting at some lower level, not starting from the Nov. lows, and not now.
Thursday, February 19, 2009
Tuesday, February 17, 2009
It looks like it may have started this am. The charts indicated that the stage had been set for "this possibility". As always, this was just one possibility for the markets.
Sunday, February 15, 2009
There have been periods of time when the market would have tested the patience of anyone subscribing to the buy and hold approach. The periods of market history I refer to are the 1929-1954 and the 1968 to 1982 time periods. The markets, as defined by the DIA Index, took 25 years to recover after the 1929 crash. And, the ~1968 to 1982 time period although a less severe bear in terms of depth (-45 % compared to the -89 % loss of 1929) but it was a time period where the market went sideways for about 15 years.
It is easy to show that for these two time periods, a lump sum, that was invested at the pre-bear peak, would have performed much better had it been in a nominal rate GIC. The green lines on the graph of the DJIA show a few recovery times, including the two mentioned above.
Saturday, February 14, 2009
Friday, February 13, 2009
Thursday, February 12, 2009
Wednesday, February 11, 2009
Sunday, February 8, 2009
Monday, February 2, 2009
The DJTA Index may turn out to be this months canary in the coal mine. If the DJIA Index also breaks below it's November low then this we create the classic and time proven Dow confirmation of a continuation of the current trend. The current trend is a bear market downward trend. In other words, a technical analysis confirmation that the bear has not ended.