It's Not Over

Thursday, Apr 26 2018 by

February 6,2018 (Updated July 12, 2018)

This article was previously published ( and is posted here in its entirety to increase awareness.

Amidst the market's current volatility, it is easy to forget that back in January we enjoyed record calm seas and gains. Back then, on Friday, January 26, the stock market was on pace to break the all-time record for longest streak without a 5% decline set back in 1959. It would have been a done deal later in February. Back in October the S&P 500 eclipsed the record for consecutive days without a 3% drop and was building on it with each passing day. Volatility, as measured by the VIX index, had recently hit record lows. The market's average open/close difference had been 0.3%, the lowest since 1965. What could possible disrupt this windfall sea of tranquility? Plenty!

That was all done away with a week later. On Friday, February 2 the 3% streak was stopped cold as the market went 3.93% below the intraday high reached January 26. With a better than expected jobs report (200,000 vs. the expected 180,000) February 2 and wage growth picking up at the fastest clip since the recession, there was widespread fear that renewed growth prospects would force the Fed to raise rates more aggressively than advertised. The next Monday's 4.60% drop made it clear that what started out as an organized exit from high dividend yield stocks had turned into a stampede for the entire market. It did not help that priced-to-perfection high flyers such as Google and Apple had disappointing earnings reports.

The February 5 drop brought to a close the market's quest for longest streak without a 5% decline. It was the worst decline since August 8, 2011, 4.62% back then, and the worst point decline in Dow Jones history at -1175. The VIX index, which had stood at 11.08, climbed to 37.32. It could have been worse. The Dow was down as much as 1597 points by mid-afternoon. Two weeks after the market had closed in record territory it went through a correction.

Those that had been lulled to sleep by complacency got a rude awakening. That whisper quiet market ride was not the new normal but it may have been a fabulous lull before the storm. So, those entertaining diving back into the…

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16 Posts on this Thread show/hide all

dmjram 26th Apr '18 1 of 16

"If you are invested in the stock market your portfolio will see a big hit."
Yes, that is the nature of the stock market unfortunately.

"Many will label me as irresponsible"
No they'll simply say you haven't a clue on when it will happen and it's stupid to make such statements.
Anyone can predict the next crash if it is their default view, in fact such people managed without fail to predict 11 of the last 2 bear markets.
The missing of the gains made in the bull markets in the mean time is somewhat less mentioned by the doom peddlers however.

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peterg 26th Apr '18 2 of 16

So after loads of shock, horror, the end is nigh, all you can come up with by way of an argument that it might happen is this bit of waffle:

"Humans go through life cycles and when combined with demographics they help us predict economic trends ahead. "

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otemple 26th Apr '18 3 of 16

I thought this was going somewhere.......

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TangoDoc 26th Apr '18 4 of 16

I'm sure if you are a "stock-jockey" who trades/gambles with borrowed money, barely caring what sort of business you briefly have a piece of, this sort of article would give you the willies. Unless somebody drops a nuke or we decide to abandon capitalism, I assume the usual ebb and flow will continue with wilder swings, from time to time. It was ever thus
My own comfort zone is to squirrel away spare cash into companies I deem to be in business for the long haul and who pay regular dividends above 3.5%. As long as the tree bears good fruit, I keep it; once it has passed its best, I chop it down, enjoying the small bonus of firewood and never forgetting the tonnes of fruit it gave, then greatly enjoy the phase of looking for a replacement. I have no time for gloom, nor that much for the size of the orchard on any particular day. For me, it's about the fruiting.

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Edinburgh Investor 26th Apr '18 5 of 16

If you want a laugh, had you taken this advice from RBS imagine the gains you would have missed out on over the last two years:

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dejekarl 26th Apr '18 6 of 16

In reply to post #357758

Good point! I tried to address the timing issue in "Not Out of the Woods" and "Still On Script". If this market follows the historical script, the endpoint should come between now and the first part of July. Given the current market level, later in the range seems more likely. I know, pretty stupid to simply go by history but it is the reason I am 100% invested long right now.

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Edward John Canham 26th Apr '18 7 of 16

In reply to post #357958


If you're 100% invested as we speak, what is the point of your article?


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James RH 26th Apr '18 8 of 16

In reply to post #357958

Well, if I wasn't confused enough by the article, I definitely am now.

Your last paragraph in the article - 'Therefore, it would be wise to make changes in future allocations and to start limiting your exposure to stocks now'

Your last post - 'I am 100% invested long right now'

Surely if you see Armageddon coming between now and July, given the doom and gloom you've prophecised above, you'd be going short, all in, and not looking back?

(Edit - Phil, post 7, beat me to it!)

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dejekarl 27th Apr '18 9 of 16

In reply to post #357978

That would be confusing wouldn't it. As I mentioned in previous posts, historically the second peak (January 26 was the first) marks the beginning of major bear markets. The historical range for a second peak preceded by a correction runs up to 5.4 months between the first and second peak. Given the time frame and a range for the second peak of -2.6% to +2.9% the top of the first, it seemed like a good idea to hitch one last ride up while it lasts.

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IGotPoesJacket 27th Apr '18 10 of 16

I see a lot of words, claiming many things. I don’t see any data to back any of them up.

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ricky65 27th Apr '18 11 of 16

"If you are invested in the stock market your portfolio will see a big hit."

Who's this guy, Mystic Meg?

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Taff6 29th Apr '18 12 of 16

In reply to post #357958

Dejekarl, enjoyed your article.
As you are predicting doomsday between now and early July. “Imagine the size of the financial storm. It will dwarf the Financial Crisis and last twice as long.”
Just to add a little balance to your article, some of us may prefer optimism to pessimism, others will then come to the correct conclusion that markets are always sat at extremes of being overvalued, undervalued or at equilibrium. The point being it is very difficult to pinpoint turning points without some sort of obvious catalyst, which are only visible on the horizon at present. The optimistic amongst us may ask you Is there any chance of this bull market continuing or recovering to the extent that the Dow Jones could reach 34500 by say before 2023 to coincide with your human life and demographic cycle before the real damage is done? I’ve used the Dow Jones index as it’s your reference index in this article but note you are referencing the S&P in you other articles.
Would also be interested if you could expand a little on your dive charts from your Still On Script article as I’ve never heard of them before and am curious to learn more about them and their construction.
You also state “I tried to address the timing issue in "Not Out of the Woods" and "Still On Script". If this market follows the historical script, the endpoint should come between now and the first part of July.”
I found your overlay of today’s market and that of 2000 suggestive of approx another 80 trading days of rising/range bound markets. This would take us well beyond early July would it not?
Unfortunately I can’t facilitate overlays but would be interested on your thoughts of the Dow Jones charts I’ve posted for comparison of today and that of October 1987. They look rather similar don’t you think? I obviously appreciate that drop is a lot less significant but from a time perspective both are about 4 months worth of data.



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dejekarl 30th Apr '18 13 of 16

In reply to post #358818

Thanks for the informative reply, Taff6. The purpose of the article was to serve as a warning but, like you, my nature is optimistic, believe it or not. That is why I mentioned I was long to indicate I do see some upside. Nevertheless, since I am using history as a guide, that upside is limited from my interpretation of the historical script.
The demographic analysis I used is similar to Harry Dent's. We both use the 46-50 year old peak spender populations as a proxy for discretionary spending. This population has been declining slowly since 2010 as the bulk of Baby Boomers began graduating from that age range. Unfortunately, that decline is slated to accelerate this year and continue until 2023 so, alas, the damage should take place between now and then. This decline manifested itself in struggling sales the first three quarters of 2017 and this past quarter. Maybe tax reform and federal stimulus can keep earnings going for a while but eventually the top line will come home to roost. Given the current multiples, potential headwinds on earnings and lack of clarity for multiple expansion, I have a hard time envisioning Dow 34500 by 2023. But if what I predict should come to pass, and you can be careful in the interim, there should be a terrific mega bull market after 2023 when Millenials start to populate the peak spender bracket.
I believe the Dow and S&P provide similar analyses. I use mostly the S&P because daily high and low data go back further. However, Dow closing data goes back further stil. The endpoint range comes from "Not Out of the Woods" where the maximum range was 5.4 months from the first peak. January 26 plus 5 months and 12 days puts it at July 8. The 2000 market peaked earlier in the range. Of course, there is every possibility this market will deviate from historical patterns.
Wow! You are right, there is a surprisingly close correlation to the 1987 market. As virulent as it was, however, it did not quite fall in the range I used for major bear markets so I did not include it in my analysis since, in addition, these were usually far more protracted affairs and as a result usually had a drop as a preamble. I did a Dive chart on 1987 market a while back and it just had one big spike with no preamble.
Regarding Dive charts, they were inspired by the work of D. R. Barton who used Hook charts. I have to admit that I had to do a bit of tweaking to get them to work. Detailed instructions on how to set them up using Excel are found in Chapter 20 of my book but I can see from your charts you may be using another program. Nevertheless, it is basically a plot of volatility vs closing prices. My study shows that volatility goes up at market inflection points so it turns out the combination of the two provide a useful chart to spot major downtrends. If there is enough demand for it I can do a write up in a post but it would be pretty boring stuff.

Appreciate the interest.

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dejekarl 6th May '18 14 of 16

In reply to post #358818

Taff6, I kept being intrigued by the uncanny correlation between Dow 1987 and today's so I did an overlay of closing prices. It follows. It took a year and a half for Dow 1987 to get back to its previous peak. So, if the correlation continues, it should be a long steady climb back up. On the other hand, if my thesis is correct, we should see a divergence to the down side by the time of the blue arrow. It will be interesting to find out which way it goes. 


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Taff6 6th May '18 15 of 16

In reply to post #361303

dejekarl, thank you for your reply and overlay. Looking at the overlay and in particular the Dow trajectory of 1987, a prominent low is visible in August. I’m going to concentrate on this low and look at the Dow chart going back to the beginning of this bull market from 2009. The chart below is a monthly chart of the Dow going back to 2009. I’ve annotated the charts with a blue arrow for august of each year since and as you can see the markets have risen each year from here, you may also note that the month of august has also marked the low point or been very close to the low point for a significant number of years since the beginning of this bull run. I’ve only used data since 2009 as I believe going back further would be negating the effect of the huge stimulus and Dow algorithm since. 


You also concentrate on the vix index which now appears to be steadying and falling back toward lows, note it’s very rare to get a double spike in the same year, below is a monthly chart of vix from 2009. 


In respect of your economic forecasting, you use the discretionary spending of the 46-50 year old peak spender population, do you have any data you could share with us to validate your of findings and how far back does the data go. You may find this chart comparing the Dow’s PE ratio to 10 year treasury yields to form a fair value for the Dow Industrials interesting. (Risk/Fear Premium)  

Credit for the chart below goes to Mike Susak of La Jolla Trading, Inc. (West Coast Options Fund, L.P.) (Any errors and omissions are from the source: Investing .com)

How to read the chart below?
Premise: $100  yielding 5% in Bonds=$5, and $100 invested in a Company with a P/E (Price/Earnings)of 20=$5 - is the same thing.

Example: On 10/21/02 the Dow's 52 week earnings = $389 & 10 Year T-Note = 4.13% Based on the chart below, the DJIA should be trading between 9262 and 9725. Why are we are trading at 8323? These are "trailing" earnings - and the future for Dow earnings is always uncertain (RISK & FEAR premium).Ten Year T-Notes are guaranteed.

The numbers as of  Feb. 26, 2017  are $998 in  Earnings and Ten Year Notes have a yield of  2.38% After rounding things up and down a bit - the Dow should be trading at $41956


Looking at the Baltic dry index also suggests that economic activity is healthy with the MACD diverging and rising above 0. (source


And may be about to break out from a long term base when compared in relation to the S&P 


Your opinion would be most welcome.

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dejekarl 7th May '18 16 of 16

In reply to post #361393

Fascinating, Taff6! A lot to digest so let me send you the reference for the 46-50 cohort in the meantime.The population data comes from: U.S. Census Bureau: Population Projections of United States by Age, Sex, Race, and Hispanic Origin: 1995-2050; National Population by Characteristic Datasets, 2010- 2016; Population Projections of United States by Age, Sex, Race, and Hispanic Origin: 2014-2060. The data I used ranges from 1995-2026. Clearly, estimates are used beyond 2010, the last census. For each year I added up the 46 through 50 year olds. Wage data came from U.S Census Bureau’s Current Population Survey for the years 2010-2015. The shortfall was calculated for each year by multiplying the population decrease by median wages for the cohort X an income after taxes factor X the velocity of money for that year.

Without the benefit of reflection my first thought goes like this. In a perfect world, there should be a direct relationship between inverted PE's and Treasury yields. My studies however, like you noted, have not found that to be the case historically. If you look at this data set (Source: FRED, Federal Reserve Database, St. Louis FED, you will find that the two rarely equate. Today, perhaps US bonds are receiving a flight to safety premium vs. other global bonds, which pushes down their yields, thus inflating Dow expectations.

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