Nicolas Darvas

Comparison of Current Bear to Bear Markets of 1929, 1973-74, 1987 suggests Dow 3,500 possible

@ 12:01 am
GMI0/6
GMI-R0/10
T210813%

I am getting tired of listening to all of the pundits saying that the current decline resembles the 1974 bear or the 1987 bear markets.   How about looking at some data!   So, I used my TC2007 market price history database to compute how much the Dow Jones Industrial average declined in prior bear markets after the market’s peak.

The results, presented in the table below, are quite revealing and unsettling if one is looking for a near term bottom.   I would be interested to learn if you agree with my analysis.

Twenty days after the Dow had peaked, the Dow   was down 7-10% in each of these beginning bear markets. By 40 days post Dow peak, the 1987 decline had already bottomed out (-41% by day 39) and rebounded to -26%.   The ferocity of the 1929 bear was evident early on, showing a 40% decline by day 40.   In comparison, the 1973 and 2007 bears appear puny, registering only 4% to 8% declines by day 40.   The 1973 and 2007 bears tracked each other quite closely until 260 days post the Dow peak.   By day 260, the 2007 bear was actually showing a greater than the decline that started in 1929 (-40% vs. -38%) and was more than twice the decline shown in the 1973 bear market (-17%). Since day 260,   the current bear market has resembled the 1929 bear market closely, with declines being about 14 percentage points smaller.   I would conclude then, that the current bear market is tracking much closer to the one that began in 1929 than to the 1973 and 1987 bears.

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GMI: 2; GMI-R: 4; T2108: 43%; 2nd day of QQQQ short term up-trend; Bill Miller’s fall

@ 12:01 am

The short term uptrend remains intact, with the GMI at 2 (of 6) and the GMI-R at 4 (of 10).   The Worden T2108 indicator is at 43%, the highest since last September and well out of bottom territory.   Tops often occur when the T2108 is at 70% or better.   Another sign of strength is that 68% of the Nasdaq100 stocks closed above their 30 day averages, the most since August 28th.   And the dollar may be breaking its up-trend, causing gold and other commodities to rise…..

If you got a chance to see the Wall Street Journal on Wednesday, you may have read the sad story about Bill Miller’s fall from grace.   This icon of buy and hope and addiction to value has seen his fund and his career get shattered.   It is very depressing that such a good stock picker apparently had no plan to abandon stocks that developed down-trends.   Fundamental analysts kept telling him how undervalued his stocks were, even as many became more and more undervalued, and descended into oblivion. We need to remember that “value” is a myth.   As Nicolas Darvas wrote, the only reason to buy a stock is if it is rising; if it is not rising there is no reason to own it.   I   hope Bill Miller can keep his job and that he learns from his painful experience.

GMI: 0; GMI-R: 0; T2108: 5%; In context of market history, current decline minuscule

@ 10:06 am

My General Market Indicators (GMI, GMI-R)   remain at zero.   There were only 23 new highs and 2185 new lows in my universe of 4,000 stocks on Thursday.   On October 10, there were 2832 new lows, so this decline has not eclipsed the number of new lows set at the October low.   The Worden Indicator is back to 5%, a level where prior bottoms occurred.   On October 10, it was at 1%.   Since 1986, the level was lower only once, in October, 1987, when it hit 0.5%. The T2108 indicator measures the percentage of NYSE stocks above their simple 40 day moving average.   It used to be a reliable indicator of when the market reaches tops (above 70%) and bottoms (below 20%).

When we take a step back from the current hysteria and look at the Dow Index each year in perspective, an amazing fact comes out.

DOWHISTORY As this yearly chart shows (it tracks each year back from the current day and does not correspond exactly with a January to December calendar) the current decline in the Dow appears minuscule when compared to the one in 1929-1932.   The 1987 decline does not register much and the 1974 decline just touches the 30 year moving average trend line (red line).   In fact, the current decline is well above that trend line. So, we may not be near a bottom today or this year……….. The great temptation that we all face is to buy the bargains and look for a bottom.   If I have learned anything from studying the great traders of the past (Livermore, Baruch, Darvas, O’Neil) it is that one cannot predict the market, only ride the current trend until it ends.   Thursday was the 58th day since I labeled the beginning of the current QQQQ short term down-trend on September 2nd.   For me, the trend is still down, so I remain in cash with a few short positions.

Thank you, Beth, for the vote of confidence.   I also want to acknowledge that Beth independently made similar comments about the Dow’s history on her email to the members of her local trader’s meetup.