Tuesday, March 3, 2009

Bear Market Bottom

No I'm not seeing any signs of a bottom yet. However, I thought I would discuss it a little to give readers a feel for where I am on this important question.

The stock markets in North America have recently started to fall below what can be described as a more or less sideways price move that began in the October to November 2008 time frame. Because the markets have now decided to go lower any hope of a bottom in that area has been lost.

The technical door has now been opened to "the possibility" of a much deeper bear market. By worse case I mean something as deep, and yes, perhaps even a little deeper than the 1929 crash (-89 %). At this time, for me at least this is an academic question. I will take it as it comes and try to profit from it. For now "I'm betting" on lower lows for the next while.

Believe it or not, another 1929 type event would be "within normal market technical boundaries".

Government officials and so called experts like Warren Buffet don't really understand how the stock markets work. If Warren really understood he would not be in such a loss position today. The problem is not subprime mortgages or foolish investments by banks or insurance companies. And even the crooks don't really count on a larger scale. These are only the "symptoms" of the underlying, broader problem.

The underlying fundamental problem is that "we" (in the broadest sense) have lived beyond our means for decades. Extremes include expensive winter holidays by working class people, mini-castle homes, two cars and replacing "things" because we just wanted something new. Paying ridiculous prices for stock issues. And, businesses that can only function with a bank loan. And I will throw in...believing in the flawed thesis of the buy and hold forever approach to investing.

In short....western society (and perhaps the world) have/had a spending problem. And, everyone has run out of money and credit. This is not a "confidence" problem. If a bum on the street has great confidence but no money or credit he still can't afford a taxi ride.

I'm not expecting the US and Canadian stimulus spending plans to turn things around. If someone is bankrupt giving them cash or a loan they can't afford only stalls off the inevitable a little longer.

With respect to the stock market, I see many stocks on both sides of the Canada/US border that still have "the potential" to continue much lower and take the indexes with them.

The chart shows how the TSX Composite Index has recently broken below its November 2008 low.


Adam said...

I've noticed the TSX making a bit of a recovery this morning after some major losses on Monday. Would you say we can expect a rally as last minute RRSP contributions try to find a home?

Canadian Money said...


It seems logical that the RRSP season deadline would have some influence on the stock market. Not sure how much influence it would have, especially this year. Recent news reports suggest people are reluctant to invest in the market at this time.

Bottom line for me. If a rally begins, for any reason under the sun, it must break through the current trend lines before it is worth any attention.

Most rallies do not do this and the majority that do turn out to be just larger pauses in the continued trend...in this case the bear downward trend.

Brian said...

Alot of these weekly and monthly trend indicators that you've pointed out are secondary trends in the overall secular bear market we are currenly in.

You make a pretty bold statment when you say that buy and hold forever is flawed. I would argue that since recorded history of capital markets, for buy and hold periods of 30+ years, there has never been a return of less than 8% annualized (2% real).

It would be interesting to hear your arguments why you belive buy and hold in capital markets is flawed.