1929 Peak versus 2000 Peak?

In a post yesterday, we questioned whether the Dow was really in the midst of repeating a pattern it went through in the early part of the Great Depression.  The post got a few comments suggesting that we make a different comparison:

• You should really plot what Louise Yamada has been saying for a long long time. She says that the entire market episode from 1928 to 1945 is being repeated all over again if you start your clock in 1999. By that count, the current year corresponds to 1939. It will be great if you could plot these charts. If Louise is right, and past is the prelude, then we are in for choppy market action for another five or six years.
• I agree with the comment about Louise’s assessment, especially if you use the Nasdaq composite from 1999 vs the Dow from 1929. I believe it’s a fairer comparison as our economy today is more technology based, whereas it was industrial based in the 30′s.
• You’re comparing the wrong time frames. Compare starting at DOW at 1929 and DOW at 2000, then look at the chart.

For those that asked for the charts with the new comparisons, here you go:

Source: http://www.bespokeinvest.com/thinkbig/2010/7/20/1929-peak-versus-2000-peak.html

Stock Market Report 3-2-10

US stocks rose on Tuesday after United Parcel Service (UPS) and DR Horton released encouraging earnings reports.

Gains were broad based on Tuesday, with 28 of 30 Dow stocks rising.

UPS reported a drop in fourth-quarter profit, but forecast a sharp increase in 2010 earnings. Its stock rose over 1%.

The National Association of Realtors’ pending home sales index rose 1%, in line with expectations. The index fell 16.4% in the previous month. DR Horton, one of the top five US home builders, reported its first-quarterly profit in almost three years and its stock jumped 11%. Pulte Homes and Lennar Corp rose over 7%.

Amazon.com slid for a second straight day, falling 2%, and limited the Nasdaq’s advance.

The S&P 500 industrial sector rose over 1%. Cummins and Emerson Electric rose between 7% and 8%. Cummins is a US manufacturer of diesel engines and other power generation equipment. Emerson is an industrial conglomerate that produces technology used by the oil and natural gas industries.

Major automakers, including Ford Motor, General Motors and Nissan all reported improved January sales. Toyota, however, saw a bigger-than-expected decline in January sales, impacted by a major recall.

Credit card companies rose after analysts upgraded companies within the industry. American Express, Discover Financial Services and Capital One Financial rose between 2% and 3%.

So far, 48% of the S&P 500 companies have reported results. Analysts expect earnings to have tripled from the prior year, although the improvement is mostly due to cost cutting and easy comparisons to the fourth quarter of 2008. The financial sector is expected to lead the advance.

In other news, Moody’s Investors Service said the outlook for the US’ AAA credit rating remains stable even with the effects of the credit crisis and recession on government debt and fiscal flexibility.

Commodities

Barron’s: Big money poll – the long term stock market view

“After the worst stretch for stocks in decades, America’s money managers say they’re bullish. But do they really believe it? Based on the results of our latest Big Money poll, the pros are hoping for the best, but … hold on! Aren’t those fresh bear tracks in the mud?

“Nearly 60% of our respondents call themselves bullish or very bullish about the stock market’s prospects through the end of 2009, a significant increase from the 50% who proclaimed themselves bulls last fall. Yet, signs of unease abound. For one, just 56% of today’s poll participants think the stock market is undervalued, down from 62% last fall. Thirteen percent say stocks are overvalued, up from a prior 7%. And an alarming 58% say the market hasn’t bottomed yet, even though the Dow Jones industrials hit a low of 6,469 in March, before recovering to a recent 8,100.

“The managers are similarly wary about the outlook for the economy, at least through the end of this year. And they are downright doubtful that the government’s first stimulus package, announced with fanfare shortly after the Obama administration moved into the White House, will be the last.

“Given these and other concerns, only 26% of the Big Money men and women expect to be net buyers of stocks in the next six months, although 66% say they will be putting more money to work in the 12-month span. But don’t look for fresh dough to flow solely to US equities. Just 44% of our respondents think the US will be the strongest market in the next year; 42% expect emerging markets to take the baton and lead. As Keith Wibel, a money manager at Foothills Asset Management in Scottsdale, Ariz., put it, ‘Confidence has been fractured. The psyche is slow to heal.’

“The market isn’t much faster. Big Money’s bullish cohort expects the Dow to end 2009 at 8,676, about 7% above current levels but flat for the year. Things, or at least stocks, will pick up thereafter, with the blue chips rising another 10% or so, to 9,488, by mid-2010. In concert with their short-term-skittish, long-term-sunny stance, more than 40% of bulls predict the Dow industrials will reach or breach 10,000 by the middle of next year.

“The optimists see the Standard & Poor’s 500 jogging to 906 by December 30, en route to 1,003 next June. The popular benchmark closed Friday at 866. Their mean predictions for the Nasdaq Composite: 1,683 by year end, and 1,841 by mid-2010, up from last week’s 1,694.

“Some big money managers are notably upbeat even – or especially – after a global financial meltdown has cut most stock indexes in half. ‘They don’t ring a bell when they announce a sale on Wall Street, but prices are as good as I’ve seen them in my entire career,’ says David Corbin, president of Corbin & Co. in Fort Worth, Texas.”

Source: Jack Willoughby, Barron’s

Sell in May and Buy Protection

Investors should “sell in May and go away,” or so goes the old adage.  We compared the returns for the Dow Jones Industrial Average since 1928 for the periods November-April and May-October to see how well this adage has held up in reality.  Our findings are in the table below.

Clearly, the November through April period has outperformed over the last 80 years – the difference in both the mean and median returns is enough to warrant further study.  What also caught our attention is the difference in the average annualized monthly volatility, itself already a very smoothed measure.  The most immediate practical implication is that a strategy that buys the Dow Jones Industrials during the months of November through April and sits in cash otherwise should have returns with lower volatility:

Returns above exclude transaction costs and returns on cash, and are logarithmically scaled. Higher risk-adjusted returns are very desirable, and one way to capture the lower return volatility of the “sell in May” approach while not giving up absolute returns might be to lever up during the November-April period and remain in cash or in a reduced portfolio otherwise. Just for kicks, we tested an approach that shorts the market during May through October (the “ShortInMay” line above); the Depression-era tumult really ruins that approach, as does missing out on the still-positive average returns of the maligned May-Oct period.

Conclusion: given the lower average historical returns and higher volatility of the May through October period, large-cap stock investors may want err on the side of buying more portfolio protection in the form of index puts during that time.

Source: Condor Options

CNBC Report by Bill McLaren – 24 April 09

FIRST LET’S LOOK AT THE S&P 500 DAILY CHART

The past four weeks the index has been struggling upward as each instance it breaks to a new high it immediately falls back below that high. But within that pattern of trend each move down was becoming smaller and smaller indicating buyers were willing to come in at very high levels. Now there is a two day move down that exceeded the two previous moves or counter trends down in price. If this is a top then we will see a rally of 1 to 4 more days that will either fail to reach the high or get just marginally above that high and then trend down with support at the 800 level.

If this is a new leg in a bull campaign the index will drive above the last high and counter trend down and show support on top of that resistance and take off to the 950 level.

NOW LET’S LOOK AT THE FTSE 100

This is the weakest of the markets I follow especially relative to the DAX and CAC 40. You can see this is a weak trend and the last move down was 4 trading days and now it is up 9 days and still way below the high. A new high would be three thrusts and a likely top but trading this many days below the last swing high is a market struggling. So if the world indexes start to trend down this is the weakest and will show the strongest move down.

But notice one important aspect of this chart which can be seen in many other charts. Except for the false break in March the index has been moving sideways for over 6 months and that could be establishing a base. I don’t have any evidence to indicate that probability but the charts say that is now possible. But this index is so weak it wouldn’t be the choice for the long side and could still be in a severe downtrend.

LET’S LOOK AT THE 1938 DOW JONES

Other than the 1930′s decline there have only been three other instances where the index declined 50% or more. The 2000/2002 decline, the 1973/1974 bear trend and the 1937/1938 decline. Last month we looked at the 1974 base and this chart is 1938 low and base. All of the instances where the index fell 50% the index didn’t change the trend to up until a significant base was formed. This (1938) market had an October capitulation and a November break of that low and a new low in March exactly as our current circumstance. You can see after the March false break low the index showed two higher lows and once that base was complete the index took off running like it stole something. We are looking for a higher low to develop to confirm the possibility of a base forming. And for now we are looking of evidence of trending down with a weak move up next few days it help set that up.

Source: McLaren Report

Has stock market rally run its course?

“From a technical perspective, a primary bear market still exists as long as the major indices remain below the January highs and the 200-day moving averages. Many of the rally’s leaders (indices and sectors) seem to be running into major resistance at these levels and look susceptible to retrace at least a portion of the gains since the March low. Further evidence of a short-term top in the making comes from a chart showing the percentage of S&P 500 stocks [90%] trading above their 50-day moving averages.”

Not surprisingly, investors’ lingering worries about the financial sector resurfaced yesterday, pulling the S&P 500 Index down by 4.3% and the Dow Jones Industrial Average by 3.6% – the worst losses since early March and in all likelihood a Lowry’s 90% down-day.

While the short-term movements play themselves out, it is important to remember that the longer-term charts have not yet signalled a secular uptrend. Using monthly data, the graph below shows the multi-year trend of the S&P 500 Index (green line) together with a simple 12-month rate of change (or momentum) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the level of the indicator is grossly oversold, as confirmed by the RSI indicator (blue line).

The stock market will tell its own story over the next few days, but it is crucial that the lows of March 9 hold in order for base formation development to remain intact. Should these levels – 677 for the S&P 500 and 6,547 for the Dow Jones – be breached, it’s “Katie, bar the door” (quoting from Richard Russell).

ASX Market Report 21-4-09

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The SFE Futures suggested a 71 point fall in the market. BHP and RIO both down in ADR form overnight – 7.31% and 9.97% respectively.  (BHP closed at the equivalent of 3176c, down 112c on yesterday’s close.) Metals all down overnight – Copper down 4.47%, Zinc 4.62% and Aluminium 3.10%. Nickel down 5.85%. Oil price down $4.54 or 9% to $45.82. Gold up $19.60 to $887.50. Bonds up with the 10 year yield down to 2.8360%. A$/US$ last traded at 69.67c.

Diversified Financials down 15%. Energy and material stocks down on the lower oil price and a big fall in metals
prices overnight. Sun Microsystems is being taken over by Oracle after IBM said it had no intentions to return to discussions about a deal – Oracle will pay $9.50 per share, a 40% premium to the last close price. SUN up 36% overnight. Oracle down 1.2%. PepsiCo will buy the remaining stake in Pepsi Bottling Group fro $29.50 per share and
Pepsi Americas for $23.27 per share – premiums of about 17% respectively. PepsiCo down 4.35%. IBM reported quarterly results after market – sales were down 11% on-quarter but profit was up more than expected – $1.70 per share verses the $1.66 per share expected. IBM down 1.5% after hours. IBM gave a bullish outlook. In other earnings news, Eli Lily & Co down 2.3% despite a 24% rise in quarterly sales.

The market is having a shocker – down 104- on the back of Wall Street’s horror session overnight. The Dow Jones fell 289. The SFE Futures predicted a 71 point fall this morning. It’s a sea of red with all sectors going backwards.

CFD Index Name Changes

Index Tracker CFD and Stock Index names will be changing. Contract symbols, however, will remain the same. This change will be automatically applied to your trading platform and any open positions. Any workspaces saved with these instruments will also be automatically updated.

Watch out for fizzling rallies – Richard Russell (Dow Theory Letters)

“The following from Financial Sense: The latest 23% surge in the Dow Jones Industrials towards the psychological 8,000-level, is its seventh significant rally of 1,000-points or more, since October 2007. During the bear market from 1929 to the bottom in 1932, the Dow Industrials fell by almost 90%. There were six bear-market rallies during that stretch, with returns of more than 20%, each one fueling a sense of renewed optimism. Yet each counter-trend rally ultimately fizzled-out and unraveled, before market indexes skidded to new lows.

“As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrials closed at 9,034 on January 2nd, its highest level since the autumn panic. The Dow Industrials melted down to as low as 6,500 on March 6, for an overall decline of 30% in two months, and to its lowest level in 12-years. The Dow Jones Commodity Index skidded to a six-year low, after tumbling by 57% since last July.

“We are now in the third Dow rally of 1000 points or more since October 7, 2007. The first over-1000 point rally started in March, 2008. The second started on November 17, 2008. The most recent over-1000 rally started on March 2, 2009. The first two rallies were wiped out with new lows in the Dow after the rallies fizzled.”

Source: Richard Russell, Dow Theory Letters, July 3, 2009.

Tricom Today Australian Stock Report 2-4-09

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The SFE Futures suggested a 58 point rise in the market. BHP and RIO both up in ADR form overnight – 1.93% and 3.04% respectively. (BHP closed at the equivalent of 3254c, up 44c on yesterday’s close.) Metals mixed overnight – Copper up 0.50%, Zinc down 0.61% and Aluminium down 0.50%. Nickel up 2.54%. Oil price down 2.4% to $48.46. Gold up $2.70 to $927.70. Bonds up with the 10 year yield down to 2.6575%. A$/US$ up 1.02% to 69.85c.

Financials up – Treasury’s Geithner made positive comments about the strengthening of US financials. Citigroup and JP Morgan up on the comments. Only 3 times in the history of the Dow Jones has the index swung over 20% in both
positive and negative directions in the same quarter. Homebuilders up on the better-than-expected pending homes sales data.

March was pitiful for the car manufacturers – General Motors down posting monthly sales down 45% on-year. Obama said a swift bankruptcy would be the best way for the car manufacturer to restructure and become a profitable producer again. Ford posted monthly sales down 41%. Toyota’s and Chrysler’s down 39%. Honda’s down 36%
saying the will partly cut production in North America. Healthcare stocks down- Biotec Celgene issued a profit warning.

The SFE Futures suggested a 58 point rise in the market this morning. 3706 on the ASX 200 is seen as resistance (the recent high), a break of that will target 3817. Now 3677. All sectors up. The banks are doing well on the back of a strong night in US financials on comments about “signs of financial recovery” from the US Treasury’s Geithner.

Stock market performance round-up: Signs of recovery

Posted by Prieur du Plessis

Has an avalanche of policy actions and bank guarantees backstopped the global economy? If stock markets are a gauge of better tidings, it would seem that a bottoming phase might have started. But the jury is still out on whether the bear is simply offering a temporary reprieve.

Meanwhile, bouncing off 12-year lows, the Dow Jones Industrial Average (+7.7%) in March produced the strongest monthly gain in more than six years. This followed the Average’s worst January (-8.8%) on record and its third worst February (-11.7%).

Coming off the March 9 lows, the S&P 500 Index has advanced 20.6% in the first 14 trading days of the nascent rally, the most since 1938, based on data compiled by New York-based S&P analyst Howard Silverblatt and reported by Bloomberg. The rapidity with which the price increases have happened is cause for concern, at least in the short term.

The ebb and flow of occurrences has affected stock markets around the word as shown by the charts below, illustrating the turnaround in bourses since the lows of November 20, the subsequent January/February pullback (in some cases breaching the November lows) and then the rally that commenced on March 10. The charts of the S&P 500, the MSCI EAFF Index (representing Europe, Australasia and the Far East – the main benchmark for non-US stocks) and the MSCI Emerging Markets Index show how the drama has been unfolding.

Source: StockCharts.com

Source: StockCharts.com

Source: StockCharts.com

Zeroing in on the numbers, the performances in the table below are given in local currency terms for different measurement terms ended March 31.

Click on the image for a larger table.

From the highs of October 2007 to the end of March, the MSCI World Index and the MSCI Emerging Markets Index lost 52.9% and 58.1% of their respective values. The worst performer was Ireland (-78.3%), with Venezuela (-17.8%) claiming the dubious honor of having fallen the least.

Considering the year to date, the Shanghai Composite Index (+30.3%) is in the lead, but the competition is mounting from a few markets that put in strong performances during March, notably Russia (+20.2%, YTD +25.8%) and Venezuela (+14.5%, YTD +22.2%).

Interestingly, mature countries are still in the red for the first three months of the year, whereas the developing markets have been the ones adding value. By means of example, all four BRIC countries – leaders in the previous bull market – are in positive territory for the year to date and also comfortably ahead of the pack since the November 20 lows. This is a sign that global investors are beginning to take more risk – a necessary ingredient for stock markets in general to improve further.

Source: StockCharts.com

The gains/declines mentioned above are all in local currency terms. However, converting the movements to US dollar shows a somewhat different picture for the non-dollar countries (see table below). In general, most indices in March showed improved gains as a result of the greenback’s weakness.

Click on the image below for a larger table.

Where to from now? A number of stock market indices tested their November lows early in March. In some cases the lows were momentarily breached, but most of these situations have subsequently reversed the damage by rallying strongly. This action indicates that base building remains a likely scenario.

Also, throughout the January/February sell-off, a number of indices remained well above their November lows – for example China’s Shanghai Composite Index and Brazil’s Bovespa Index. This provides strong evidence of base formation development and it would not be surprising to see these markets among the leaders of the next bull market.

Biggest Dow Point Gains and Percent Gains

Today’s 497.48 point move (6.84%) for the Dow was the 5th biggest one-day point gain and 23rd biggest one-day percentage gain.  Below we highlight a list of the biggest point and percentage gains for the Dow since 1900.  We’ve now had 11 400-point up days during the current bear market, so as happy as they make investors feel, they haven’t been out of the ordinary.

Source: Bespoke Research

Two commodity ETFs about to reverse their downtrends

The stock market took a breather from its recent upward sprint yesterday, as a round of afternoon profit taking reversed morning gains. All the major indices finished lower, but divergence among the main stock market indexes was quite evident. The Dow Jones Industrial Average slipped just 0.1% and the S&P 500 lost only 0.4%. However, relative weakness in the tech arena weighed on the Nasdaq Composite, which fell 1.9%. The small-cap Russell 2000 similarly declined 1.7%, while the S&P Midcap 400 receded 1.4%. All the major indices closed at their intraday lows.

Under the surface, the worst thing about yesterday’s session was the higher volume that accompanied the pullback. Total volume in the NYSE swelled 17%. Turnover in the Nasdaq rose 3% above the previous day’s level. The higher volume losses caused both the S&P 500 and Nasdaq Composite to register a bearish “distribution day,” the first instance of institutional selling since the current rally began. Although an occasional “distribution day” is normal in uptrending markets, a round of higher volume losses so soon after the start of a developing rally is negative. Just one more “distribution day” this week could kill the broad market’s fledgling short-term uptrend, but stocks could just as easily shake off yesterday’s bearish impact of institutional selling if the major indices see another round of higher volume gains instead. We’ll be closely monitoring the volume patterns of the market over the next several days, as volume is one of the few technical indicators that never lies. Furthermore, volume patterns tend to predict price, making volume analysis a leading, not lagging, indicator.

For the past week, U.S. Oil Fund (USO) has been consolidating just below pivotal resistance of its 50-day moving average, holding above support of its 20-day exponential moving average. On March 9 and 10, USO probed above its 50-day MA on an intraday basis, but failed to close above it. But yesterday, USO closed just forty cents below its 50-day MA, positioning it to breakout above its 50-day MA for the first time since July of 2008. Shown on the chart below, we like USO for buy entry above the $29 area:

Another commodity ETF that may be in play this week is DB Commodity Index Tracking Fund (DBC). After forming a base at its lows over the past month, DBC rallied to close just above the high of that month-long consolidation yesterday. If it gains another thirty cents in today’s session, DBC will have also moved above its 50-day MA. This would break the intermediate-term downtrend line, shown on the daily chart below:

A scan of several hundred ETFs last night revealed very few bullish chart patterns. Likewise, quality short setups were not that plentiful either. Specifically, the issue is that last week’s rally caused a majority of stocks and ETFs to move into “no man’s land,” trapped between resistance of their intermediate-term downtrend lines above, and support of their short-term hourly uptrend lines below. Since longer-term trend lines hold more weight than shorter-term trend lines, and the intermediate-term downtrends have not yet reversed, aggressively buying at current levels would carry a negative reward-risk ratio. Conversely, since short-term sentiment has definitely changed over the past week, we’re not yet thrilled with the idea of new short positions into the current upward momentum. The daily chart of the S&P 500 below illustrates the present “no man’s land” position of the index:

Overall, our plan remains the same as we’ve been detailing for the past several days. We simply want the market to prove its ability to recover from a downside correction of the current short-term rally, something it’s been unable to do in past months. If the major indices register another day of losses today, but subsequently rally back to their preceding highs later in the week, better buy setups should start to arise. If so, we would begin to enter new long positions in anticipation of a bullish reversal of the broad market’s intermediate-term downtrend. In the event stocks fail to pull back any further this week, we’ll at least look for a couple days of sideways price consolidation, then plan to buy a subsequent breakout above the high of the consolidation. Don’t worry about missing “the bottom,” as there will be plenty of opportunities to profit if the short-term rally materializes into a tradeable, intermediate-term uptrend.

Long – DGP, SLV, UGA
Short – (none)

Dow Jones Industrial – longest streaks below 200-day moving average

“As we noted yesterday, even after Tuesday’s strong rally, the major averages remain well below their long-term 200-day moving averages (DMA). The last time the Dow closed above its 200-DMA was 204 trading days ago (5/19/08). This represents the eleventh longest streak of trading below the 200-DMA in the Dow’s history and the longest since 1982.

“Looking ahead, given the large spread between the current level of the Dow and its 200-DMA, we have a ways to go before the index reaches that level (or the moving average catches up to the index). Therefore, even if we get a strong rally over the next two months, by the time the Dow closes above its 200-DMA, the current streak is likely to be at least the sixth strongest in history.”

Russia ETF may be ready to roll

Stocks capped a very strong week on a positive note last Friday, as the market’s winning streak extended to four consecutive sessions of gains. After drifting lower throughout the morning, it initially appeared as though the major indices were headed for a slight correction, but the bulls resumed control in the afternoon, enabling the broad market to finish at its highest level of the week. The S&P 500, Dow Jones Industrial Average, and small-cap Russell 2000 each climbed 0.8%. The Nasdaq Composite and S&P Midcap 400 indices gained 0.4%. Finishing near their intraday highs, all the main stock market indexes advanced approximately 10% for the week.

Turnover eased in both exchanges. Total volume in the NYSE declined 11%, while volume in the Nasdaq was 17% below the previous day’s level. Trading in the NYSE remained above 50-day average levels, but Nasdaq volume slipped below its average pace for just the second time in a month. In both the NYSE and Nasdaq, advancing volume beat declining volume by a modest margin of approximately 3 to 2.

While many ETFs, such as the financials, have merely bounced off their lows, the Internet HOLDR (HHH) is poised to break out above a multi-month band of price consolidation, and is already above both its 20 and 50-day moving averages. It looks good for potential buy entry above the $35 level. Take a look:

Another interesting pattern is forming in Market Vectors Russia (RSX), which our sister service, the ETF Portfolio Tracker already entered last week. The daily chart of RSX is shown below:

Unlike the domestic stock market indexes, notice how RSX has been showing relative strength by holding above its lows from November 2008. On numerous occasions throughout January and February, RSX tried to breakdown through its November 2008 low, but it held firm. Now, RSX has gapped up above resistance of both its 20 and 50-day moving averages. Further, the 20-day exponential moving average is about to cross up through the 50-day moving average, a bullish indicator of intermediate-term trend change. If RSX moves above last week’s high of $13.75, bullish momentum should carry it substantially higher in the short to intermediate-term. A protective stop can be neatly placed just below convergence of the 20 and 50-day moving averages, around $12.

Because last week’s reversal occurred so suddenly and sharply, the main stock market indexes are showing “V bottom” formations. This means the angles of the short-term uptrend lines are roughly the same as the angles of the preceding downtrend lines before the market reversed. This is shown on the daily chart of the Dow DIAMONDS Trust (DIA), a popular ETF proxy for the Dow Jones Industrial Average:

As you may have noticed firsthand, trading the V bottom pattern can often be challenging because the rally is often too swift to allow traders to participate in the initial upward move. Although one could just blindly jump in on the buy side at the first sign of strength, such a strategy would have proved to have been quite costly over the past year, as a vast majority of rapid bullish reversals have failed. Therefore, a safer strategy for participating in the current rally, is to wait for the market to prove itself. Specifically, we’re waiting for the first day the major indices close significantly lower, then watching to see if they easily recover those losses, rather than falling apart, as they have done so many times in the past. At that point, when stocks begin heading back up, after a significant pullback, we’ll get the green light to begin more aggressive buying operations.

On an absolute basis, last week’s percentage gains in the broad market were impressive. However, because the stock market had fallen so far, so fast, only the short-term trends changed from bearish to bullish; the intermediate-term trends are still pointing “down.” But if the main stock market indexes pull back, then subsequently rally above the preceding highs, the intermediate-term trends will change as well.

Whats Hot and Not – How different investments did last week.

Dispelling Myths About Stocks in the 1930s

By MARK HULBERTThe Depression wasn’t as bad for stocks as many think. That could bode well for the future.

MUST WE LOOK BACK TO THE Great Depression to really understand the current stock market?

A year or so ago, when a select few investment newsletter editors began arguing that we need to do so, the overwhelming majority of advisers believed that drawing such an analogy served little purpose other than fear mongering.

It is testament to the severity of this bear market that the consensus opinion has shifted so much that it is now respectable to look to the 1930s for guidance about what is in store for equities.

I’m skeptical, however. That’s not because I don’t think that decade has much to teach us.

My skepticism instead traces to the small number of analysts and commentators who have really analyzed what an analogy to the 1930s truly entails. And if we are to genuinely learn the lessons of history, we have no choice but to start with an accurate assessment of what actually happened.

After examining several aspects of the stock market’s behavior during the 1930s, it would appear as though a replay of that decade might very well be less scary than assumed by many of those who superficially draw the analogy.

Here are some myths about the Depression that should be dispelled.

MYTH 1: It took 25 years for the stock market to recover its losses from the high reached just before the stock market crashed in October 1929.

It’s easy to see why investors believe this myth to be true: It wasn’t until Nov. 23, 1954, that the Dow Jones Industrial Average closed above the level at which it closed on Sept. 3, 1929, the date of its closing high before that year’s crash. That’s a recovery period of more than 25 years.

If the recovery from the bear market over the last year and a half were to take the same length of time, the Dow wouldn’t again close above its all-time high from Oct. 9, 2007, of 14,164.53 until — you’d better sit down — Dec. 28, 2032.

The truth, however, is that it took stocks far less than 25 years to recover. According to Wharton finance professor Jeremy Siegel, the inflation-adjusted total return index of the U.S. stock market was just as high in late 1936 and early 1937 as it was at its precrash peak in 1929. That was less than eight years later.

That may not be great news to investors who are hoping to recover their bear market losses in just one or two years. But it’s a whole lot better than taking 25 years to recover those losses.

WHY THE BIG DIFFERENCE?

One factor is dividends, which were substantial during the 1930s. At the depths of the Great Depression, in fact, the Dow’s dividend yield was in the double digits. Ignoring dividends, which is what investors do when focusing on price alone, therefore, introduces a significant pessimistic bias into any historical analysis.

ANOTHER FACTOR IS DEFLATION: The consumer price index actually dropped by 27% between its 1929 peak and its low in 1933. A stock that dropped by less than this amount in nominal terms over this four-year period, therefore, actually turned a profit in inflation-adjusted terms.

Yet another reason why it took the Dow so long to surmount its 1929 peak: The decision in 1939 to delete International Business Machines from the average. It wasn’t added back until years later. According to Norman Fosback, editor of Fosback’s Fund Forecaster, the Dow would today be more than twice its quoted level had IBM not been removed from the average in 1939.

MYTH 2: If we’re playing out a 1930s script, now would be a bad time for long-term investors to get into the stock market.

Actually, if the stock market were to exactly adhere to a 1930s-like script, equities would provide a handsome return over the next five years.

Once again, this insight relies on data from Professor Siegel. To locate the date during the 1930s that is most analogous to today, he looked for the point at which the stock market after 1929 had — as is the case today — declined by around half on a dividend-adjusted and an inflation-adjusted basis. That point came at the end of 1930, just 16 months after the August 1929 stock-market top. (Ironically, of course, the current bear market is just 16 months old too.)

According to Siegel, over the five-year period beginning in January 1931, the stock market produced an inflation-adjusted total return of 7%. That’s right in line with stocks’ long-term average performance, in fact.

To be sure, this myth does have a big grain of truth to it. Over the first five months of 1931 — the first five months of this five-year period — the stock market fell 60%. You read that right: That’s a 60% drop on top of a 50% drop over the previous 16 months.

If the stock market today were to suffer a further decline of similar magnitude, the Dow Jones Industrial Average would be trading below the 3,000 level by the end of July.

So, to that extent, it is true to say that, on the assumption we’re playing out a 1930s-like script, now would not be a good time to enter the stock market. But this truth pertains more to shorter-term investors than to longer-term investors. According to Siegel, in fact, an investor who entered into the stock market in early 1931 was made whole again by June 1933, despite digging a 60% whole in the first five months.

MYTH 3: The stock market’s recent extraordinary volatility provides a clue to the wild ride that lies ahead if we’re playing out a 1930s-like script.

Actually, undeniably large as it has been, recent volatility doesn’t even begin to compare to what it was like during the 1930s.

In fact, there were eight calendar months during the decade of the 1930s in which the Dow rose or fell by more than 20%. The month with the biggest Dow move was April 1933, when the Dow rose by 40.2%. In August 1932, furthermore, the Dow rose by 34.8%.

The biggest monthly losses during that decade were almost as big. The largest came in September 1931, when the Dow lost 30.7%.

These monthly changes dwarf what has been seen in the current bear market. The biggest calendar month loss so far came last October, when the Dow fell by 14.1%. The second biggest came in February, when the Dow fell 11.7%.

To measure the magnitude of the stock market’s volatility during the 1930s, I calculated the standard deviation of the Dow’s monthly returns on a trailing 36-month (or three-year) basis. In mid-1933, this statistic rose to 15.4%, an extremely high number. During the current bear market, in contrast, this comparable statistic has never risen above 4.1%.

The bottom line? If we are indeed playing out a 1930s-like script, we have an incredibly wild ride ahead of us. But for those who have the intestinal fortitude to hang on, such a story would have a surprisingly happy ending.

US Bear Market Losses: $11 Trillion Dollars

By Barry Ritholtz

Here is a mind blowing stat:  Stocks have lost $11 trillion in market value since the October 2007 peak, according to Marketwatch.

This is based on the Dow Jones Wilshire 5000 index, which includes nearly every U.S.-listed stock. Losses since the start of 2009 are $2.6 trillion. Nearly half of all stocks in the index are now trading at less than $5, and 37% are under $3.

Nearly 50% of all stocks in the Wilshire 5000, the broadest index of U.S. equities, are trading for less than $5 per share, and 37% are under $3.

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Wilshire 5000 October 2007 to March 2009

Major US Market Index Movements

As shown in the table below, the major US indices suffered another miserable week, recording eight losing weeks out of nine in 2009 and falling to 12-year lows. The Dow Jones Industrial Index’s 2009 year-to-date decline of 24.5% is by far the worst start to a year after 44 trading days since 1900. According to Bespoke, there have been 19 previous years where the Dow was down 5% or more at this point, and only four of those years ultimately finished in positive territory.

The Dow is currently down by 53.2% since its peak of October 2007. Chart of the Day points out that since 1896 only the bear market that started in 1929 has produced a larger slump.

Tricom Today Stock Market Report 3-3-09

View Report

The SFE Futures suggested a 78 point fall in the market. BHP and RIO both down heavily in ADR form overnight – 7.85% and 9.9% respectively. Metals all down overnight – Copper down 3.26%, Zinc down 2.39% and Aluminium 1.79%. Nickel down 4.50%. Oil price down 4% to $40.07. Three-day rally over on the deteriorating outlook for the world economy. Gold down $2.50 to $940.00. Bonds up with the 10 year yield down to 2.86%. A$/US$ down to 63.01c. The Bank of America’s CEO is saying the $20bn he borrowed from the government to buy out the failing Merrill Lynch last year was a ‘tactical mistake’.Materials and Energy stocks down 6.9% and 6.4%. The market is down 48 and in-line with the 87 point fall predicted by the SFE Futures this morning. It was down 97 at worst. Not a lot of company related news and no real theme this morning except everything’s down. One feature is Macquarie Group which has bounced from being down 4.8% to up 7.0% at its peak. No announcement and have yet to dig up a reason.
RBA Meeting Today – Decision at 2.30pm – Lots of opinions about what they will do. A Dow Jones newswire consensus of 18 economists suggest a consensus for a 25bp cut.