Crash!

Where's the market been? Where's it going? Should I focus my search on recent time periods, or should I include the boom and bust years of 1996 through 2001? Here we discuss the markets, and how they can best be exploited.

Postby Overload » Sat Jan 24, 2009 2:28 pm

All comments are welcome, thanks for the input. I won't even mention your comments about America, although I'll add that they're coming from someone who's country brought us Celine Dion.

I personally don't have a prediction one way or the other. Instead, I tend to look at the general writing on the wall and see how much of it points in either direction. Right now, I'm seeing a great deal of both, and to me that's an indication of a great deal of unknown in our future. That, in itself, is actually a worthwhile approach. From a trading perspective, should I back test against 2001-2002 or 2003-2007? Personally, I believe both possibilities should be considered right now, as should a more modest period like 1993-1994. That's what you have to do when there's so much unknown... be prepared for anything.

I also believe a great deal of the dire predictions we've seen have been made on a more technical basis. But there are other non-technical factors that come into play as well. We'll just have to see how it all plays out.

Pete
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Re: We are on the edge

Postby Dacamic » Sun Jan 25, 2009 3:49 pm

Blaine,

To help me know whether I am correctly understanding your post, I have a few questions:
    1. In general, do you consider stocks (in the U.S.) to currently be reasonably-priced based upon fundamentals?
    2. Is the technical picture sufficiently blurry to make it unclear whether stocks will be higher, lower or unchanged at year-end compared to present?
    3. Would lower prices be bad?
Thank you.
Steve
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Your 3 questions

Postby cme4pif » Sun Jan 25, 2009 7:16 pm

Hi Steve;

Lets answer those one at a time
1. In general, do you consider stocks (in the U.S.) to currently be reasonably-priced based upon fundamentals?

Fundamentals are a bit of a mess right now. Some firms like IBM have a lot of "in the pipeline" revenue that still works, but for most of the market the forward looking numbers are any ones guess. Canadian Oil Sands Trust for example looks stellar, based on earnings, but all their budget is based on oil at $50. If Oil goes to $17, you got a mess. Look at Conico, it drops like a rock when Oil drops, but Exxon doesn't? Look at Prudential, no toxic debt, lots of cash, solid balance sheet, and all time low PE. Some days people are bidding up Citi and other toxic banks that are in effect bankrupt and a solid profitable bank like Bank of Nova Scotia, is down 30%? Value investors have no place to hang their hat right now, its a traders market. I am not even trying to value stocks now. I have a lot of my money in Pipelines, with dividends over 10%. The only logical value play I like now is TBT -- nobody want a zero percent return.

2. Is the technical picture sufficiently blurry to make it unclear whether stocks will be higher, lower or unchanged at year-end compared to present?

Well that depends on the indicator, I think that if you are trying to call a bottom you can not use trend following indicators, they always call for more of the same. If you use oscillators and bands, we look range bound. If you use prior history like the dshort graph, things look very positive. If you use that Elliot wave chart this could get very ugly. But I don't believe in Elliot wave theory.

Today I ran some technicals on the S & P 500. The trend indicators, the Aroon, Parabolic SAR and MCAD say the market will continue down next week. But I look at it, and my gut says, nope, I think we trade a tight range and break out positive. The S & P at 800 to many traders is the line of value, that we can not breach for too long. If I am right, then we must go up, but then does it fail again at 950-970?

3. Would lower prices be bad?
Things going on sale are good news, unless you have things for sale, I am long the market here, so that would be bad. But I have some tight stops so not too bad. On the other hand I sold my house -- so lower housing prices are now in my best interests.

What I do know is, those who buy when there is blood in the streets, make a lot of money. Warren Buffet, Benjamin Graham and the Rothschilds comes to mind. I once heard about a lady in NYC she bought 3 apartment buildings from a big insurance company for $1 in the crash of 1929, by the 1970's her family was worth many millions.

Then there is the trader's enemy -- ego. It is fun to play I told you so and call the bottom. In March 2008 I firmly stated that was the bottom. It was a great learning experience, as I was right for a few weeks, and then it all disappeared.

My real fear of going way below S & P 800 is two fold, first, that would mean a very long recovery, and long recoveries come with years of flat markets, that is a traders nightmare, like sailing in no wind. We lost a whole generation of investors in the 1940's to 1960's.

Second if the market goes south we really might have deflation and that would mean every consumer who does not spend is better off. That makes for an awful bleak economy.

Blaine

Note from Moderator: As this discussion has gone off-topic, it's been moved to the following link.
http://stratasearch.com/forum/viewtopic.php?t=662
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Postby Dacamic » Fri Feb 13, 2009 5:39 pm

The equity market's seesaw teetered in favor of the bulls late last week, but Tuesday's decline this week showed us that another leg down was simply waiting for a catalyst (enter Geithner, stage right).

The S&P 500 continues to follow the pattern set in the 1930's (now matching early 1938). Accordingly, the prevailing bear cycle -- which began in October 2007 -- is probably in its very late stages. My expectation continues to be that a bull cycle will begin in March. By following the 1930's path, the S&P 500 will re-visit its November 2008 low (740) and, maybe not coincidentally, form a double bottom.

Cycle transitions can create tough trading conditions. I expect to see a definitive drop as the bear cycle ends, with maybe one false-start rally early next month. After hitting bottom again, the ensuing climb will start very quickly, maybe 10% in less than ten trading days ... which might be about one-third of the total bull-cycle move. A "blink and you'll miss it" sorta thing. There is, of course, the very real possibility I'm all wet and will be quite wrong, a thought bringing us back to the first sentence of this paragraph.
Steve
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Re: Crash!

Postby Overload » Sun Feb 22, 2009 6:55 pm

I know you've been making comparisons to the 1930's all long, but I'm surprised to hear you say our comparable position is now 1938. That would imply a couple things. First, that the worst is now very much behind us and the dire predicitions of a 4300 DJIA will not transpire. After all, the worst years from the 1930s were 1932-1933, so 1938 would put us well beyond that. But the second thing is that, by being at 1938's position already, we would have compressed the entire event into a much smaller time frame than the (roughly) 12 years it took to recover from that comparison period.

Unless I'm mistaken, you've diverged from your earlier Landry'esque predictions. Could you shed a little light on that?

Pete
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Re: Crash!

Postby Dacamic » Sun Feb 22, 2009 9:05 pm

With apologies, I have not been sufficiently clear about what is meant by "1930's". Given the widely popular comparison between now and 1929 - 1932, people easily could assume I was making the same match ... but, I'm not.

The pattern match I've been following starts with 1925 and 1995, and then lines up the major peaks of the S&P 500 in September 1929 and August 2000 (on a monthly close basis) and major peaks in October 2007 and February 1937. Stated differently, I am comparing the secular bear market that started in October 1929 to the prevailing secular bear market beginning in September 2000. Accordingly, I mean "1930's" and "2000's" quite literally, i.e., 1930-1939 and 2000-2009, respectively.

If the above suggested match is appropriate, we should have seen a cyclical bear market -- a bear within a bear -- begin early 2008 to coincide with the one that started in early 1937. The prevailing bear cycle actually began a couple months earlier than "scheduled" (in November 2007), but being off a few months in this context ain't being off by much. We would have also expected to see a stunning downdraft starting August 2008, which instead commenced a month later ... again, pretty darned close.

With the above being said, the following comparisons have been relevant during the past 14 years:

    Bull cycle: early 1925 - late 1929 & early 1995 - mid-2000
    Bear cycle: late 1929 - mid-1932 & mid-2000 - late 2002
    Bull cycle: mid-1932 - early 1937 & late 2002 - late 2007
    Bear cycle: early 1937 - mid-1938 & late 2007 - early 2009 (?)
With the above in mind, U.S. equities did not compress the 1930's into the past sixteen months, rather U.S. equities have been mired in a secular bear market for almost 8 years. As a quick example, the S&P 500 is unchanged compared to early 1997. So, regardless of it being good news or bad, we have already endured a lot.

Although he doesn't specifically reference the same time periods as myself, Terry Laundry has consistently suggested the bear would roam footloose and fancy-free from 2000 until at least 2010 ... and maybe as late as 2020. A bear market running from 2000 to 2020 would "nicely" match that which lasted from late 1929 to mid-1949. So, Terry and I came at this from different directions, but reached similar conclusions (by the way, my sincere apologies to Terry if I'm misrepresenting his work and its conclusions ... any errors in interpretation are mine, not his).
Steve
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Re: Crash!

Postby cme4pif » Mon Feb 23, 2009 5:17 am

Hi Steve
With all due respect, I just don't see this as anything like the Crash of the 1930's

look at this chart
http://www.dshort.com/charts/bears/four-bears-large.gif
Notice a double bottom every time the recovery started.

But charts aside, just look at the facts,
For one thing the DOW in the depression ended up at down 80%.
Right now the S & P is down 50% that is right in line with all modern bear markets.

Think what it would mean by logic alone.
If the S&P goes to the next support level about 650 then this bear will be down 65%
To be the great depression S and P will need to go to 250!

But here is why it can't.
Today S & P is about 780 and Caterpillar -- CAT sells at $26 a share and has a PE of 5 (16 billion market cap)

Let look at the S & P at 650
Dow stock Caterpillar, will be at $14 a share (9 Billion Market Cap)
with a PE of 2.5

In other words, we go out and raise a little Saudi Oil money at 8% interest, and buy the whole
Caterpillar company (takeover) then repay the loan with company revenue (LBO),
and it will only take 2.5 years to do it? WOW!

Everyone raise their hands, who would like to be given for free a multinational company like CAT.
You would own it, 100% private in your hands !! I would love to be the CEO and sole shareholder of CAT
and I think my son would like to be the next CEO.

If the market goes to 85% down like the 1930s you will pick up CAT for one years earnings
(and the market cap will be about the value of 2 stealth bombers).
That is hardly even a loan.

In short, when stocks are too cheep -- in comes the money. There is trillions on the sidelines
poised to come in soon.

Today is not like then.
The world has changed form the 1930's, too much new technology, too much comunication
to much population it is a different world.
Right now, a 22 year old man in South Africa is checking the price of his GLD ETF on his iPhone screen.
My Dad would not even know what that statement above meant -- he picked his stocks from the newspaper.
I feel there is no sense looking at stock prices or market moments pre1960, it is a different world.
It s like trying to compare JFK and Julius Caesar.

Unlike the 1930's we have the FDIC,
a US GDP of $45,000 next GDP down the list is about $32,000 for Canada
China per cap GDP is $500
most of the world's money is in the G8 nations.
the world financial markets are here now, in the 1930 they were in Europe.
We see far more Yachts and Lear jets than we saw in the 1930s
no nation even comes close to the current prosperity of the USA.

One last thought, America got in this mess, by loaning money to buy houses at crazy prices
but who got that money? home sellers, flippers, speculators, tradesmen, Home Depot and home builders
Those people still have that money, in America they are still rich.
Who financed those loans? Who will get ultimately burned? Mostly foreign countries.
So who really benefited? the US economy and who is paying the tab? Mostly foreign countries.

Cheer up, this is not the end for America's economy.
The Black Swan will not kill us now, any more than Y2K 8 years ago.
Oh and that 2012 Mayan calendar thing I think is a lot of Howey too. :)

Blaine
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Re: Crash!

Postby Dacamic » Mon Feb 23, 2009 12:30 pm

Let's see if I can use a picture instead of my usual 1000 words.

The chart below shows the S&P 500 on a monthly close basis, with the red line being "1930's" and "2000's" shown by the black line. The 1930's prices have been normalized to match the respective peaks in September 1929 and August 2000 as highlighted by the left blue circle. The right blue circle shows where we are today in comparison to the 1930's, which is approximately early 1938.

I recently heard a very apt phrase: Although history repeats, it does not duplicate itself. (Unfortunately, I do not remember who mentioned that phrase, and so cannot give them due credit.) In regard to the chart below, the various peaks and valleys have different heights and depths when comparing the two periods and the timing of trend changes are not preciously synced; nonetheless, I found enough similarities to conclude a pattern occurring 70 years ago is repeating itself today, even though contemporary action is not an exact duplicate.
Attachments
SP500.gif
SP500.gif (69.46 KiB) Viewed 11171 times
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Re: Crash!

Postby cme4pif » Tue Feb 24, 2009 3:13 am

hmm, see me eating humble pie. :oops:
S & P hits 743. Dow hits 12 year low.

wow I was not expecting today at all, it you had told me 6 months ago the S & P could break 750 I would have bet $10,000 you are wrong.
I am flat the market right now, since all my stops have kicked in, but its like watching the twin towers again. Shock and Awe. They say you should buy when ever you feel like you are going to puke on your shoes.
I know an Eliot wave group that is targeting S & P 630. I am afraid it looks like they are right, we are only 100 points off that -- they told me this last summer, I thought they were nuts.

CATERPILLAR PE ratio hit 4.3 today, that equals a market Cap of $15 billion
You can pick up the the whole Ford motor company for $4 billion, there are car US car dealers with 1 billion of Sales per year!
That is chicken feed -- to pick up two DOW components?
You can buy Prudential for $7 Billion, and they have $37 Billion in the bank in cash!
Mr. Bloomberg in 2007 said he might spend $1 billion just to run for US president
1 billion is about enough money to run a primary school system for 500,000 population for a year.
Cisco Systems has $30 Billion in Cash on it balance sheet they should go shopping!
where are all the LBO guys?

Amazing! -- I am already in cash, sold my house and my stocks,
now I think I better start digging a bunker, and get some shot gun shells. :shock:

Blaine
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Re: Crash!

Postby cme4pif » Tue Feb 24, 2009 4:47 am

That was appreciated by Mark Twain, who commented: "History does not repeat itself, but it does rhyme."
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Re: Crash!

Postby Dacamic » Thu Feb 26, 2009 1:33 pm

This thread will have its second birthday tomorrow. My, my ... time sure does fly when you're sitting inside a barrel wondering whether the roar you hear is from financial waterfalls already survived or from those yet to be plunged.

Blaine's recent post prompted additional thought about the good ol' Price Earnings ratio (PE ratio). In my opinion, this ratio is a versatile metric for studying and monitoring the U.S. equity market. I could easily prattle at length about this trusty tool; however, I shall make at least some effort to be relevant and, more importantly, brief.

In the "Big Fat Duh" category, the PE ratio has two components: 1) Price; and, 2) Earnings. Continuing in my Captain Obvious persona, I shall also say PE changes when either Price or Earnings change. (For the benefit of those straining to hear these wisps of wisdom, please hold your applause until the end of this post). U.S. equity markets have shown themselves to be rationally priced based upon very long-term averages, i.e., equities tend to be fairly-valued based upon earnings. With that being said, I shall conveniently conclude -- possibly by somewhat flawed deductive reasoning -- that the average PE ratio of the S&P 500 can be properly used as an estimate of fair value for that index; thus, the S&P 500 is fairly valued when its PE ratio is near its 138-year average of 15.

For discussions purposes we can create a fair-value PE range for the S&P 500, for example from 14 to 16. With that being assumed, the S&P 500 has been above fair value on a monthly-close basis continuously since 1995. Even though this index's "Price" has declined almost 50% in the past sixteen months, its PE ratio has only dropped from 21 to 18 ... because "Earnings" have simultaneously moved 40% lower (and, almost 50% lower than their peak). Personally, I prefer using a ten-year average for the "E" portion of PE, an idea I borrowed from Terry Laundry ... who borrowed it from Dr. Robert Shiller. An average of this nature helps smooth out business cycles and non-recurring accounting charges (which have an interesting habit of recurring), both which adversely affected earnings during the past twelve months. The S&P 500's PE ratio -- using ten-year average earnings -- fell into the fair value range in November 2008 ... ending a stay above fair value that began in 1991.

As implied above, the S&P 500 hasn't spent much time hangin' around fair value during the past decade or the decade before that or the decade before that or ... (repeat ad nauseum). In fact the S&P 500 was within the above-described fair value range about 15% of the time since 1871, with a very wide range between top and bottom, 45 and 5, respectively. This "wide range" reality brings us to a favorite topic of mine: PE contraction and expansion. Markets shift between manic and depressive states. Specific to U.S. equities, PE ratios are usually either expanding (manic) or contracting (depressive). Extended periods of PE expansion or contraction are labeled using terms you will quickly recognize: secular bull market (expansion) and secular bear market (contraction). Let us glance at a few stats in this regard:

    October 1929 - June 1949 (Bear Market)
    S&P 500 Index: start = 31; end = 14 (-55%)
    S&P 500 Earnings: start = 1.55; end = 2.40 (55%)
    S&P 500 PE: start = 20; end = 6 (-70%)

    June 1949 - December 1968 (Bull Market)
    S&P 500 Index: start = 14; end = 106 (660%)
    S&P 500 Earnings: start = 2.40; end = 5.76 (140%)
    S&P 500 PE: start = 6; end = 18 (200%)

    December 1968 - August 1982 (Bear market)
    S&P 500 Index: start = 106; end = 110 (4%)
    S&P 500 Earnings: start = 5.76; end = 14.17 (146%)
    S&P 500 PE: start = 18; end = 8 (-56%)

    August 1982 - August 2000 (Bull market)
    S&P 500 Index: start = 110; end = 1518 (1280%)
    S&P 500 Earnings: start = 14.17; end = 53.11 (275%)
    S&P 500 PE: start = 8; end = 29 (263%)

    August 2000 - Present (Bear Market)
    S&P 500 Index: start = 1518; present = 826 (1/31/09) (-46%)
    S&P 500 Earnings: start = 53.11; end = 44.97 (-15%)
    S&P 500 PE: start = 29; present = 18 (1/31/09)(-38%)
As shown above, PE "mood swings" have had a significant impact during the past 70 years, usually affecting prices more than earnings do. In the present day, the S&P 500's decline is mostly due to PE contraction ... and, based upon history, further contraction is yet to come. The basic math of the PE ratio makes it easy to understand any such additional contraction can occur through lower prices, higher earnings or a combination thereof (we shall avoid discussions about inflationary and deflationary effects, at least for now). In the prior two secular bear markets, the S&P 500 hit its ultimate price bottom well before the end of the bear market period, pushing its PE down to 7 at those lows. Keeping earnings constant, a similar PE today translates to the S&P 500 index being equal to about 300.

Naturally, it's easy to describe scenarios creating specific PE outcomes. Consistent with comments made a few weeks ago, I still believe the S&P 500's ultimate bottom is several years away; thus, there is time for earnings to recover and PE's to contract without that index falling below 600 (per my earlier prognostication).

Wow, I should not have implied this post would be brief. My bad.
Steve
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Re: Crash!

Postby Dacamic » Tue Mar 17, 2009 3:43 pm

Although the S&P 500 didn't move precisely as I expected during the past few weeks (stunning, right?), it nonetheless appears the bear has staggered into his pen and collapsed from exhaustion after his extraordinary rampage through equities. I accordingly shifted my bias to "long" and re-activated my long only system late last week.

As mentioned in my recent posts, I believe the prevailing secular bear market will not end before 2012. Although he appears to be resting at the moment, a continuing pattern match between then (1938) and now (2009) would see the bear wake from slumber before year-end. A 30% move up from the S&P 500's low last week seems reasonably possible, but obviously it is my guess that sometime this Fall might be a good time to shift bias to neutral or short.
Steve
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Re: Crash!

Postby Overload » Mon Mar 23, 2009 10:08 pm

Steve, I have to say that your predictions on the overall market have been pretty impressive. I'm not sure I'd be willing to say "In Steve We Trust", but you're certainly more deserving of the phrase than... well... a few other guys. Well done.

Pete
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Well where from here

Postby cme4pif » Sat Apr 11, 2009 11:55 pm

Hi Steve;
We have had an impressive run, I am very tempted to dust off my permabull hat, and buy more equities, but interestingly enough along comes this signal

http://www.screencast.com/users/erikdbr ... 64f366e6de

It always seems just when the market is about to take off, I get a bit of data that keeps me back form the market.
As I read it -- every time XLF viloates its Bolanger Band, we have a pull back, but then again XLF would also violate a bollanger band in a run away up turn market.

What does Steve think we have instore this week?

Blaine
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Re: Crash!

Postby Dacamic » Mon Apr 13, 2009 2:42 pm

Blaine,

The chart you linked shows an overbought condition, which is consistent with my current overall opinion about U.S. equities. I accordingly wouldn't be surprised to see major equity indexes move lower a few days this week to relieve at least some "overbought" pressure. In general, though, my bullish bias remains intact.

The 1930's-to-2000's pattern match shows the cyclic bull move beginning in March will continue until September, although most of the up-move will be done before June. Based upon the handwriting I currently see on the wall, my bias will shift to bearish (again) this Fall.
Steve
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