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.
What can this tell us about the likely duration and depth of the current decline? First, if the current market decline resembles more the one that began in 1929 than in 1973, we would suspect that the current decline will last longer than the 1973 decline of 482 days and somewhat nearer the duration of the 1929 bear of 714 days. We are currently 342 market days post Dow peak, by my count. This suggests to me that the current decline could last another 370+ market days or about 74 more calendar weeks. In addition, if the current decline continues to track about 14 percentage points below the 1929 bear, its bottom of -89%, implies that the Dow could ultimately reach a bottom that is down about 75% below the Dow’s peak of 14,198.10 or about 3550.
Finally, it is likely that all market declines are driven by the economic context as well as investor psychology. So, note that major breaks during the 1973 and 1929 bears occurred around 420-440 days after the Dow’s peak. This could imply that a major psychological reaction (disgust? fear?) occurs around this stage of a decline and that the current market decline could accelerate at that time, about 4 months from now.
Of course, my interpretations are all based on the idea that the current bear will continue to track the 1929 bear. One cannot be too sure of how bears will behave though–ask any California state park trooper. Regardless, I think I am now more likely to pull back my horns and stay in cash or in a short position. It looks to me like this decline will continue at least as long as the 1973 bear–unless it doesn’t.
The GMI (0 to 6) and GMI-R (0 to 10) remain at zero. There were 7 new highs and 718 new lows in my universe of 4,000 stocks on Friday. This was the most new lows since late November 21st (1835) at the bottom of that decline. The Worden T2108 Indicator is at 13%, in what used to be bottom territory. My General Market Indicators (GMI) have helped me to steer clear of market declines since 1995. It is absolutely astonishing to me that the financial establishment continues to urge people to stay invested. I guess it is because brokers and mutual fund managers make no fees if their customers just sit in cash.
Anyway, as this table shows my GMI indicators continue to be in a terrible state. The last time I saw at least 100 daily new highs in my universe of 4,000 stocks was on September 19, and since then the few stocks that hit new highs rarely were trading higher 10 days later. Thus, buying growth stocks at break-out highs has been a losers game. This method, made famous by Nicolas Darvas on his way to making 2 million dollars in two years, just does not work when the general market is declining.
Why is it that when most stocks are declining, most people look for stocks to buy? Falling stocks fall for a reason, and most stocks are falling these days. It is so easy to make money buying stocks in a rising market when the GMI is greater than 3! As for now, the best thing for me to do is to be short or in cash. The way to make big money in investing is to be out of the market during the worst times.