Not Out of the Woods

4th Apr '18 by dejekarl

5 comments 4624 reads

February 21, 2018

NOTE: This article has been modified to serve as a complement to the now published full length article (http://ezinearticles.com/?The-...). It provides the charts and table publishers could not publish.

That is right. If you thought the worst was over and you could return to business as usual with the stock market, think again. The spike in volatility alone should signal there has been a paradigm change. Regardless which popular metric you use; PE, Shiller’s CAPE Ratio, or Buffett’s Market to GDP comparison; this is still one of the most expensive markets of the past century. The other two were the 1929 and 2000 markets and we know how those turned out. And we still have a demographic scenario[1] that warrants a major market drop.

The question is when. Some folks are under the mistaken impression that stock market crashes occur at market tops. That is far from the truth. A study of major bear markets, those declining 28-plus –percent, since 1923, the year the precursor to the S&P 500 was introduced, reveals there is always a preamble to every major bear market. This is shown in the analysis below for each of the following major bear markets (28% decline or more): 2007, 2000, 1987, 1973, 1968, 1962, 1946, 1937, and 1929. Intraday prices and daily closes are only available for the S&P 500 from 1950 on. Therefore, Dow Jones Industrial Average closes were used for the markets before that.

2007

The initial top for the 2007 market came July 17 when the S&P 500 had an intraday high of 1555.90. After dropping 11.9% the market would climb again to a market top for the index of 1576,09 October 11, 2007 - 1.3% higher than its previous high. It would then drop to 666.79 March 9, 2009 for a 57.7% decline.

5ac43dde85882S&P_500_May_2007_-_April_20

2000

The market climaxed at 1552.87 March 24, 2000 for the S%P 500. It would drop precipitously April 14 to a low of 1339.40 – a 13.7% drop – but then slowly recovered to 1530.09 by September 1, 2000, only 1.5% below its all-time high. The market bottomed at 775.80 October 9, 2002 for a 50.1% decline.

5ac43df794b0eS&P_500_Sept._1999_-_Dec._2

1987

After hitting a high of 337.89 August 25, 1987, the S&P 500 dropped…

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AnonymousUser252054

4th Apr '18

That's very interesting. I'm curious, how have you positioned your portfolio in anticipation of a possible imminent collapse?

ISAallowance

As I read it, you've shown that every bear market has been preceded by an initial dip/correction, but you haven't told us whether every dip/correction immediately precedes a bear market, and if not what is the probability of a bear market in some time span following a correction. Without that, it's hard to draw any conclusion from your post to the current market, other than that current high valuations and the recent correction provide the historically requisite conditions for a bear market to start.

dejekarl

Until recently I was totally out of the market in retirement accounts I could not short. Otherwise, I was short. After Monday's drop, I decided to put my money where my research was. Given that it indicated the market would rise until at least 2.5% of the January 26 high, I went all in on the S&P 500 either in ETF's or funds. I do not recommend it for the weak at heart and I am a bit nervous myself. Nevertheless, I hope to make an 8 - 9% return and then get out...for good.

You are correct on both accounts. My previous research indicated that we were on the verge of a major downturn. As a result, I began with the premise a major bear market was in the works. The study is, therefore, focused on only major bear markets and not bear markets in general. I do not know at this time if all bear markets are preceded by a drop, but I know major bear markets are. Given the numerous drops and corrections, it is likely that the percentage preceding bear markets would be too low to be actionable, although it would be an interesting study.

mojomogoz

Obvs got to get the right pattern.

The issue to factor in is that USD hegemony is ending to be replaced by nothing (Renminbi not able and ready). With that exorbitant privilege over the US must convince the world that it’s paper’s good. That’s a tough gig. So the USD is in a structural downtrend. It’s a balance of payments crisis but with unusual characteristics relative to the classic (like Argentina). The USD will remain transactionally supreme throughout as the unit of account but just not the denomination of value.

What does that mean? It’s just not the same game. Old pattern are a bit bogus. It’s possible that equity markets remain expensive in US and get more so. For example, if you’re China you can’t sell all that US debt paper for, say, Brazilian. So perhaps swap it out for dollar denominated real assets.

mojo real out

Not Out of the Woods

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Dejekarl

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