“History doesn’t repeat itself, but it does rhyme.” -Mark Twain
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I think it is safe to say that the Nasdaq Composite was the main driver of speculation, as far as the broad indices were concerned, during the bubble that popped in 2000. Similarly, the Dow Jones Industrial Average saw a comparable run up during the “Roaring Twenties,” leading up to the Crash of 1929 and subsequent Great Depression.
Below, you will find the present day quarterly chart of the Nasdaq, as well as a quarterly chart of the Dow Jones leading up to, during, and after the Great Depression. I believe that the two charts are similar enough to warrant using the elder one as evidence of possible scenarios going forward.
According to the old Dow chart, the most likely scenario for the next few quarters for us now is an overall slow, albeit choppy, move sideways to down. You can draw your own conclusions, but I do believe the fundamental and technical backdrops are similar enough to make this exercise a constructive one.
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Nice look at a longer time frame Chess. That multi-year triangle seems so obvious when presented like this. Kudos.
Thanks Kenai.
fascinating charts, pro!
ty
Welcome, Duane
Agree 100% – I think the Technology sector is going to lead the rebound run prior to a continued decline.
Good luck this week!
gl to u too Moose
Appreciate your blog. Caution is the key and the graphs show your point well. That is why I am 80% cash, want to hold onto gains from last year. Agree that trend is lower but coin can be made with short term selective picks. July earnings reports and reaction to them will tell us a lot Chess. Keep up your fine work, very helpful to me.
Thanks for reading and for the kind words.
You had me at Mark Twain…great view. It’s getting a little crowded out on the ledge, but a good reminder that a comparable move could take us to levels that scare the crap out of most of us without meaning the end of civilization.
True, interesting to see what happens.
So if the triangle breaks to the downside…. hmmm
Canned food and guns.
Time to buy some HRL
do they make Spam?
Chess,
futures tanking as we speak, are you a little concern about your longs? Are you still seeing a bounce tomorrow or wednesday?
I’ve placed my bets and I’ll let things play out. Remember over two weeks ago on Sunday night when the futures were rocketing higher, and we had a morning gap up? Well, total reversal from that point on. I’m not going to play the panic game.
I agree with you Chess!
Nice post as always!
AS I type, futures are flat right now. Either way, i’m hoping for a summer rally before we go lower. 🙂
Good luck!
Chess, great post as always, I always read your stuff.
The 70s may be a good historical charting analogy also. That period is remembered today as a bear that started in the 60s, 66 and 68 are oft given start dates. The climactic bottom was a long time in, in 74, and the valuation bottom came several years later.
Another thing to think about is the long term trend of equities. We sit well below it for the first time since the early 80s…
Thanks checklist–great points as well.
Most bullish aspect of this market for intermediate-term is way public seems to consistently be shifting from stock to bond funds. The outflow is becoming epic in its consistency if not its magnitude. Public nearly always wrong about this.
But key difference between two charts is: Many of NASDAQ 5000 contributors don’t even exist any more. Most Dow stocks survived.
I think survivorship bias, though, would tend to discount actual stock returns rather than show them as improving. For example, GM got kicked out of the DOW after basically going to zero, same with C. Yet out of those 2, C has survived and would almost no doubt contribute more to the DOW over the next X years than its replacement. And so on.
no?
tomorrow’s tape will be what it is, and the talk of tanking futures seems a bit exxagerated and premature. Except, I suppose, they are trading at 1110, which is quite a way below Fridays close.
I would like to post up a point or two, and I will choose to do so in your space, Chess, because I have many times in the last 18 months done an excercise similar to what you did above: where, looking at history, can we find something of a loose prediction or at least ballpark idea for what is to come.
From every dramatic, epic market crash that brought us way below the long term trendline (this is early 30’s, 1974, and 2009, not necessarily 2002/2003) we experienced a huge rally of at least 50%, followed by choppy sloppy action.
From the very dramatic drops (50ish% or more, these being 1930’s, 1974, 2002/3, and 2009) we have seen:
1932-1935: powerful but choppy rally from the great depression bottom of more than 100%, followed by almost 2 years of choppy generally sideways action in which the biggest peak-to-trough was around 20%,and then another impressive almost 2 year run in which stocks nearly doubled again… this still bringing them to a level still far from their previous high. I’m looking at the DJIA here.
2003-2007: big rally off the bottom (especially in the nasdaq) followed by a year of sideways chop with some fairly significant peak to valley corrections (especially in the nas) followed by significant gains going forward.
1974-1977: big (>50%) rally off the bottom, correction, additional rally bringing things to ~70% off the bottom, then years of sideways choppiness with a general down slope.
The 30’s were the depression, of course, and for all the drama and panic today things are not nearly as bad now. Nobody had their savings destroyed by a bank failure (cash savings, not investment savings), the country won’t be murder-holed by a dustbowl this time around, etc. Its not as bad this time as then.
The 70’s were marked by energy crisis and huge inflation. These were not happy times.
The early 2000’s were helped out of the hole by the housing bubble, and to no small extent the drama of their drop was… made more dramatic by the surrealistic heights from which they were falling. Make no mistake, at the peak of the markets in april 2010 stocks were not priced in bubble territory, but rather were pretty reasonably priced based on earnings estimates for this year, next year, price/book, and price/dividends+cash returned to shareholders.
Remember, in 1980 dividends were many times more common than share buybacks. Today buybacks are far higher than dividends. If companies quit buying back shares and paid the same amount of cash out to shareholders as dividends, we would likely right now show a cheap historical valuation in this regard.
Additionally, the record cheap valuations seen in the late 70’s and early 80’s … coincided with 10 and 30 year treasury yields in the teens. Today its 3%.
There really isn’t a precedent for a market crashing, rallying significantly, and then crashing again so soon. In every case once our markets had made a significant bottom (like march 2009) they did not crash anew so soon. The second big crash in the depression happened many years after the first one. The bottom in the late 70’s and bear market in the early 80’s happened long after the climactic 1974 crash. Etc.
History would seem to favor higher highs than the april 2010 highs (the climax of the first leg up) before the next significant crash.
Beyond that, we sit for the first time in 20+ years, significantly below the long term trendlines. Draw a line through the yahoo finance post-ww2 S&P chart (inflation era chart) and you come up with something around 1300 for where the S&P should be now to be in line with the historical trend. It was FAR above than trend in 2000, of course, dipped about to the trend in 02/03, and then rallied well above it again in 06/07. It deviated north of the trendline, really, starting in the mid 90’s. Black monday dipped about back to the trendline, the whole 1970’s were more or less below the trendline, etc.
From “stocks for the long run” here: http://www.alleycompanyllc.com/assets/images/serice4_202.gif
That 200+ year chart similarly suggests that the S&P should be around 13-1400. Interestingly, the 200 year returns of the british and american stock markets are remarkably similar. I had a nice chart of that from somewhere once.
Alot of bad stuff is going on now, to be sure. Alot of bad stuff. But alot of bad stuff has gone on in the past as well. That 200 year chart spans the pound falling from reserve currency status and the dollar rising to it, a couple of world wars, civil wars, Britain going from ultra world power to really not ultra world power at all, the US rising to ultra power, inflation, recessions, depressions, etc.
But stock returns over very long periods of time have, apparently, been reasonably consistent. This all leads me to believe that, over very long periods of time, something intrinsic to business and the human beings tendency to weigh business decisions drives stock returns. Like ROE or something like that.
And being well below that long term trend line, unless someone wishes to suggest that Siegel’s study was massively flawed, suggests that we may still be in a decent time for buy and hold investors to buy and commence holding…
None of that, of course, means that stocks can’t tank 20 more percent in the next 2 months, leaving millions of people sick to their stomachs and plunging the world into another recession (crashing markets are very recessionary). …
But it doesn’t seem that history favors the odds of a big crash spaced so closely to another big crash, and it does seem that history favors equities over the next decade or 2. Thats the good news.
The bad news is that it does seem that history favors a considerable continuation of this secular bear market… And over the “short run”, which in light of a 200 year chart is probably a year or 3, sentiment and current events are more powerful drivers than whatever mysterious force (probably ROE/ROI and something in the human psyche that drives business decisions, as in we won’t go into biz for ROI’s lower than X or something like that) drives those long term returns.
I haven’t any idea what the market will do tomorrow or over hte next 3 months. None. No skill or insight that I posses rivals things like the PPT or Doug Kass’s experience, etc. But it does seem that if we had a second dramatic crash right now, that would be a first in history.
I always open to being called bad names and accused of buffoonery, just so everybody knows.
There isn’t anything in history that rhymes with 2 crashes inside of 2 years with a significant recovery in the middle…
Aside from boredom, I see no logical basis for doing this type of analysis. I think there is such a thing as reading too much into patterns. Chess, I don’t think you fall into this category so much, but I get annoyed when people use TA on absolutely everything, like a chart of the VIX, or 3x ETF. Like that, with trying to take guidance from a 100 year chart, you’re effectively trying to use a sample size of 1 to make some type of prediction. I mean, why would that work? Back in 1929, what prior chart pattern was that mimicking perfectly?
I think there’s a big difference between doing TA on the VIX or a 3x ETF, and what I did in this post. I believe the two time periods and chart patterns are similar enough to warrant the comparison. The charts speak for themselves in terms of the similarities.
True, you could say they look similar. But then inferring that therefore, we should progress in the same way would, in my opinion, be a variant of selection bias. You’d also need to factor in the myriad number of patterns that started looking the same, then broke in a different direction, and in doing so, eluded the observer’s view for comparison.
Right, but there really haven’t been too many comparable equity bubbles that have gone this far parabolic in the past 100 years. I mean, sure, the 1966-1982 bear market is somewhat similar, but a much different fundamental backdrop. If we had a better data sample to choose from, I would be all over it. I mean, I have seen charts of the South Sea Bubble and the Tulip Mania too, and they would be more comparable to the dot com bubble than any bear market from the 1970s or early 1980s.