Is the Market Bottom in Sight (Again?)
Interesting take over the weekend in Marketwatch on stock market bottoms relative to historic trendlines.In past bear markets, whenever equities as a group fall into the range of 40-42% below trend, at bottom was not far off.
HFN editor Peter Brimelow, along with ESR Research’s Edwin S. Rubenstein observe:
“We have looked at stocks relative to this long-term trend line. When we last looked, we found stocks were down 38% below trend, around the levels seen at historic bear market bottoms in 1981 (40% below trend), 1974 (41% below trend) and 1932 (42% below trend).”
The concept was developed via Jeremy Siegel’s Stocks for the Long Run. (Note: Siegel does not necessarily agree with their conclusions).
Brimelow and Rubenstein show the historic relationship between the two via this chart:
The >
Source:
Stocks’ bottom in sight. Again.
They can’t go much lower before reaching unsustainable depths
Peter Brimelow & Edwin S. Rubenstein
Marketwatch, 9:28 p.m. EST Jan. 18, 2009
http://tinyurl.com/stockbottomtrendreversion
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January 19th, 2009 at 8:52 am
Long and longish term charting is useless. The stock market performed differently before the US was taken off the gold standard. The stock market performed differently before the the internet and the free flow of information became commonplace. The stock market performed differently before the global economy emerged. In more recent times, the stock market performed differently before the credit bubble. This is all new territory with new relationships to discover. The to-be-successful will base their plans on new ideas.
January 19th, 2009 at 8:53 am
Barry,
Since many are equating what is happening here to what occured in Japan since 1990, could you do that same analysis for the Nikkei since 1974? It might give some of us another data point for our considerations..
And speaking of Japan:
http://www.rttnews.com/CorpInfo/EconomicCalendar.aspx
Note the massive decrease in the world’s second largest economy in month to month capacity utilization and industrial production….1/18/09 11:30 pm
January 19th, 2009 at 9:05 am
Re: Dead Hobo
Reminds me of the old saying “don’t fight the Fed,” which actually used to make sense until the Fed began using interest rate targeting as their modus operandi. All those studies suggesting, say, low PE ratios only worked during periods of Fed non-intervention/easing need to be thrown out the window after Mr. Greenspan came on the scene.
Anyway, yeah, totally agree with your points, and would only add that Fed behavior is markedly different today than it was in 1974.
January 19th, 2009 at 9:51 am
Indeed, the market bottom might not be far off, but the when is really what’s important, in other words “not far off” is a relative term.
After all, if I just look at the DOW if we were to re-test the low maybe this summer that we had on 11/21, you had better be careful and set some stops for yourself. Maybe we re-test next summer, in the large scheme of things 12 months is “not far off”. I’d just be careful is all.
I was laughing over the weekend when I was looking through the ST Almanac and my market notes so far this year, I noticed this quote on 1/12:
“Major bottoms are usually made when analysts cut their earnings estimates and companies report earnings which are below expectations.”
- Edward Babbit Jr. (Avatar Associates)
If that doesn’t describe today I don’t know what does, in the fullness of time we will see if he’s right.
January 19th, 2009 at 10:08 am
A trendline seems kind of forced. Over a 35-year span with daily tracking points, the trendline was crossed roughly 5 times. (Since the graph is logarithmic we are actually talking a parabolic curve, just to complicate things.) While 40% off trend looks interesting, it is also a measure of imprecesion. Without getting into a whole project, my eye ball says that 70+% of the points are greater than 10% outside trend and better than 50% are more than 25% off trend. If the curve were constructed with apexes in 1974 and 1997, I would likely have higher fidelity and an implied deep drop coming. The natural question at that point would be why would place apexes in those spots, and it would be a fair question. Why we think 1970 to 2005 should follow a trend line is the unanswered asssumption in this graph.
January 19th, 2009 at 10:08 am
Secular bear markets have never ended until P/E ratios have declined into single digits. If I’m not mistaken current forward estimates are for earnings of about $48. That would put P/Es in the 20 range. Hardly bear market bottom stuff.
Bear markets also decline much farther than anyone believes they can. Can we really have seen the bottom after only one year? Doubtful!
Finally we just put in the last 4 year cycle low in Jan. of last year. The next low isn’t due till summer or fall of 2010 at the earliest.
And last but not least secular bear market lows are characterised by the blackest of investor sentiment. No one ever wants to buy stock again as long as they live. I dare say very few Americans have even given up on their 401K accounts at this point. Probably 90% are still holding on waiting for the market to come back like it did from the 2002 bottom.
The powers that be are doing everything in their power to turn this into a depression. By keeping all these failed companies alive they just guarantee that the deflationary forces remain intact. As long as money has to continue to flow into these companies just to keep them solvent it’s not going to be going anywhere is like into new capital formation. Not to mention they are going to bankrupt the US in the process.
January 19th, 2009 at 10:17 am
I have one big problem here…expand this chart another 50 years. The trend line is LOWER than stocks were in 1932. Does that mean stocks were expensive then? The trend line simply shows how unusually fast stocks have gone up in the post WWII period.
Also, notice that stocks are increasing at a factor of 10 every 35 years on this chart. Doing the math, I come up with an annual return of 6.8% BEFORE dividends (assuming this chart doesn’t show dividends, since 2008 we’re at the same levels as 2002). Even if it includes dividends, it’s a tad bit high, considering earnings growth has only averaged 6% over the last 50 years. I’m one to believe our debt problem, and the simple fact that population growth won’t continue at the same exponential rate forever will cause earnings over the next 50 years to be around 5%. So now we can change the slope of the trendline so that stocks increase by a factor of 10 every 50 years.
You can’t have 7% stock growth forever when earnings are only going up at 6%. I’m guessing in 10 years that trendline will be losing a lot of its slope.
January 19th, 2009 at 10:25 am
Depends on what you mean by “historic.” Going back less than 40 years is not history to me and it’s certainly not “history” to my father who lived through the big one and made 95 yesterday. DJ was down about 90% by 1932.
No one really knows how bad things will get. Even if the averages don’t collapse much further, how long will they take to rise? As Marc Faber pointed out to CNBC in a recent video, the Japanese markets are about where they were in 1981.
January 19th, 2009 at 10:27 am
Trend followers watch moving averages.
I pulled up the weekly chart for the SPX. Looking at this chart the 200 week MA has turned down.
The 50 week MA is down.
The 50 day MA has flattened out but is still trending down.
The 20day MA has turned up slightly, crossed the 50, but has turned down again.
Thus if you were a trend follower you would probably have covered your short, but be ready to short again.
Fundamental analysis is futile, price action tells you what’s happening.
January 19th, 2009 at 10:34 am
Different era, different problem, different causes, different action taken. Different models and analysis needed. The whole concept of a bottom and subsequent bull market may no longer hold true. The psyche has been changed for a generation. The psychological scars can’t be measured by P/E contraction and earnings growth. Not until the non-professional market participants have trust, and confidence in the public markets will tried and true ‘professional’ metrics and measurements be meaningful. IMHO anyway.
January 19th, 2009 at 10:37 am
I agree with dead hobo. Too many different variables for a true apples-to-apples comparison.
January 19th, 2009 at 10:41 am
Eric Janzen of Itulip.com, has a target prediction of a bottom for the Dow at 5,500. He said to short the Dow December ’07.
January 19th, 2009 at 10:42 am
Is this the same Jeremy Siegel who insisted the government could make money on the TARP program? Who, despite being a university professor, runs a paid website where you can pay money to hear him give “buy and hold” advice over and over again?
January 19th, 2009 at 10:48 am
KC has a point. The bulls of the past generation have tried to extrapolate from an unusually strong period in our nation’s history starting after WWII where we were the only man left standing. This has been an era we were the strongest military and economic power on earth and the dollar was the world’s currency. It is pretty clear that that is ending; basing predictions on that era is dangerous.
As Taleb points out in his books, people are deceived by survivorship bias. We think the American markets will do well because they have survived and done well, but that is a small sample size. But we don’t look at those who have fallen by the wayside. In 1905, Argentina’s per capita GDP was 80% of the US. In 1914, 27% of French foreign investments was in Russian securities because they looked safe, 5% was in Ottoman, and the British Pound was the most solid of global currencies, backed by the most powerful empire the world had seen. We all know what happened.
January 19th, 2009 at 10:52 am
It’s true… I mean RBS can’t go much lowerrrr….uhhhh….oops!!!!!!
January 19th, 2009 at 10:54 am
1932 might have been the end of a bear market but I think thats a case of missing the forest for the trees. 1932 was a tree in the Black financial forest
January 19th, 2009 at 10:59 am
UK and Denmark are guaranteeing bank toxic assets today. What inning is this? Are these things done in a recession or depression?
Intrade depression contact at 56 now
http://www.intrade.com/jsp/intrade/common/c_cd.jsp?conDetailID=647817&z=1232138463943
January 19th, 2009 at 11:02 am
Barry,
This is again from your bud, David Rosenberg, and why extrapolations from sets of linear data may no longer hold true.
http://www.mainstreetmonroe.com/voice/topic.asp?topic_id=12743
“Consensus making predictions based on linear data
At the same time, what I see is a forecasting community that continues to make
predictions based upon linear data that have been completely interrupted by the
secular change in the credit cycle. And I think because this is all so far beyond our
own collective experience, the tendency has been to underestimate the role that
asset deflation and debt repayment plays in the economy.”
Not my thoughts, but from another full time economist…
January 19th, 2009 at 11:03 am
Do you think we have no jobs due to a bad economy or do we have a bad economy due to no jobs?
At least Obama gets it and the very long painful recovery that never needed to take place can at least start. It will be many many years before recovery is in sight. One thing is clear the job situation has to get better. The sooner the better.
January 19th, 2009 at 11:12 am
Just sayin…
The bears on many boards (CR, Ticker, Mish) seem too bold here. The “it’s different this time” arguments should (not) work equally well at bottoms as well as tops. Fundamental (sane) arguments for bulls are in short supply. But the bears cases on why this is worse than ever before (different) gives me some pause.
January 19th, 2009 at 11:16 am
Oh, well, it is snowing here and the salt mine is slow this morning…if we are going to expect Europe to help us get going, it may be tough sledding…
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4278642/Monetary-union-has-left-half-of-Europe-trapped-in-depression.html
Monetary union has left half of Europe trapped in depression
I am sure you are being quite careful with your toes…do you think the bottom is in, Barry?
January 19th, 2009 at 11:18 am
Another example of going to a public university for a chance at an education or to a private one to get a job selling instruments to your parent’s friends.
January 19th, 2009 at 11:29 am
Bruce,
Who thinks Europe is going to help get us going?
Maybe you were joking?
Snowing here too, DE. Good day to get a lot done at work.
January 19th, 2009 at 11:30 am
Yes, joking is correct. From what I read, Europe is done for awhile…even moreso than us.
January 19th, 2009 at 11:35 am
I figured, I was thinking, ….he’s got to know how bad things are there.
January 19th, 2009 at 11:35 am
It amazes me how investors construct narratives out of more or less randomly selected data sets in their attempt to predict an unknowable future. The latest bit of groupthink to crash and burn is the whole “average recession length/stocks go up 6 months before economy recovers/buy now for a second half 09 recovery” meme, which bid up stock prices 20% in the face of an unrelenting stream of increasingly dire economic events. Making investment decisions based on trend lines seems more of the same.
Sure, it’s possible things could go up. There is at present no significant evidence of any form of economic recovery that I know of, but markets could perhaps remain irrational long enough for such evidence to arise and justify investors faith. We can then expect learned articles about how the market has recovered to it’s historical trend, I guess.
Sadly, it’s as least as likely that the unique situation we are in today will result in further losses. So far, there is no real evidence of anything except further global economic weakness, and most of the recent and fleeting bright spots have been in areas where government intervention has (probably temporarily) staved off disaster (autos, some financials). To me, the risk/reward just isn’t worth it, and making investment decisions because of an arbitrary few lines on a graph a road to disaster.
January 19th, 2009 at 11:38 am
And my earlier post about the Japanese and the cliff diving they are having as far as industrial production…I suppose you could sum up my feelings to be that I have been thinking about whether this is the beginning of a depression, and frankly, in the last few weeks I have become convinced that I will treat my investments like we are in the early stages of depression. I wish Greenspan had never cut rates to 1% and left them there so long…perhaps some of this could have been avoided…but there is plenty of blame to go around.
I went to a birthday party Saturday night, and one of my friends who manufactures equipment for the trucking industry was there. He has 150 working for him, and has let 50 go over the last 2 months. He tells me that he thinks he can hold out until the end of May, but if there is not a really significant upturn, he will declare BK and the business will close.
We are going hiking next weekend with a bunch of folks including he and his wife, and I’ll keep a running commentary on how he’s doing..if he wants to talk about it..
January 19th, 2009 at 11:38 am
Call me when we hit or go below DOW 7,000 and S&P 700. That still may not be “the bottom” but we’ll be making progress in getting there at that point? Too many book-talking greed-meisters are out there calling bottoms for it to be “THE bottom”.
When Bowyer and Luskin finally stop appearing on CNBC or writing columns for the WaPo and WSJ, I’ll know THE bottom is in.
January 19th, 2009 at 11:40 am
@Bruce: I’m with you. Preparing for the worst. Have been trying to find reasons why we won’t be going into a depression or at least depression-like conditions, and those reasons seem to be dwindling fast. If the worst doesn’t happen, then I’ll be very, very happy and pleasantly surprised.
January 19th, 2009 at 11:58 am
I think I’ve mentioned this before, but using Price/Peak Earnings, the S&P can fall to “225″ before it’s equally valued with 1932. I’m not saying it’s going down to that level, but if we’re using trendlines to compare the future and the past, we might as well consider that we can still fall a LOT more.
January 19th, 2009 at 12:02 pm
What crap. There should be a law against morons like these access to data.
January 19th, 2009 at 12:07 pm
This week’s “Market Bottom?” post reminded me of last week’s “Market Bottom?” post…so I went back to check it out…I could have sworn it was posted last Monday. It was a post which essentially stated that Fusion IQ proprietary data indicates we “may be at the bottom” and it had a chart or two in the post.
That prior post does not appear to be there anymore. Does anyone else remember that post? Do I have the wrong date, perhaps? I do know it was posted when DOW was slightly above 9000….I wanted to compare it with this most recent post.
Thanks.
January 19th, 2009 at 12:24 pm
I dunno, I’m not an economist, nor even an experienced trader, but it strikes me that trying to extrapolate trendlines out of statistical anomolies with a data set you can count on 1 hand and spanning 75 years, seems a tad thin.
Or put another way, a more relevant question might be, what are the indicators we can point to that would imply fundamental reasons for reflation of the DOW and other indices? Consumer debt loads? Retail sales? Wholesale purchasing reports? Existing home sales? U-6 Unemployment figures? Credit markets?
Or are we just hunching on an Obama bump and the expected stimulus plans?
None of those prior data points can provide a comparative basis for whats going on with the Fed and Treasury balance sheet madness, and the state of the rest of the globe sitting in the crapper as well. My hunch is a short term horizontal plateau before another Q2 drop. Based on nothing more instinct, so I defer to the chartologists among us.
January 19th, 2009 at 12:47 pm
Of course, it’s also possible that the “buy-and-hold” bears will be in for a disappointment, along with the “buy-and-hold” bulls. For example, the SPX might spend most of time during the next 12 months between 800 and 900, with brief forays above and below. So even if SPX 750 is “close to a bottom”, it could be a long time before a sustained bull move occurs.
January 19th, 2009 at 1:20 pm
garysavage’s answer was sage I thought.
I would only add the question: Do you expect the US to prosper in the next decade anything like it has since 1980 given the prospect of trillion $ deficits as far as the eye can see even before Medicare & SS obligations kick in? In an environment of increasing socialism (or whatever you call the strangling tentacles of gov’t in our economy), increasing gov’t debt, eventually increasing taxes & inflation, do you really think the economy will return to trend?
January 19th, 2009 at 1:21 pm
and if so damned many people wouldn’t apply all at once for unemployment, maybe we could get some figures we could have faith in….sheeesh….
http://www.upi.com/Top_News/2009/01/19/Calif_jobless_benefit_system_overwhelmed/UPI-93841232341904/
Calif. jobless benefit system overwhelmed
January 19th, 2009 at 1:25 pm
My wife and I toured car dealers here in San Jose on a clear, 70 degree Sunday afternoon and found them all essentially deserted. No matter what the charts say, we’re a long way from a bottom.
January 19th, 2009 at 1:25 pm
Some of you seem to be missing the fact that November brought about some deeply oversold conditions, there were plenty of very well run companies with clean balance sheets that are in fact doing o.k. that just got wiped out often through forced sales from hedge funds/mutual funds/pension funds/endowments, and fear.
Just my opinion but to me this is why the market moved up 20%. It’s not, as someone said above, because everyone is buying into a second half recovery and then the belief that stocks move up six months prior to the recovery. I would agree that kind of thinking is silly and it certainly isn’t a strategy.
That said,
If you have any sort of time frame I’d be smart and ease into positions, if you must own equity I’d buy in small increments with stocks that pay a dividend that will actually get paid (no banks for example) and do so with some fairly tight stops or with option protection if you want to hang on.
I think DL is correct in saying we are most likely going to stay in a broad range, the whole idea of the L shaped recession. I don’t have the balls of Steve Barry which is why I’m not short anything right now.
In that range bound environment dividends are going to be very important, much like they were for long term investors (not traders) prior to the 1982-2007 market.
If you want bonds, well you already missed some very easy money, but there are some very attractive corp and muni issues out there to buy.
Finally, I don’t recall seeing any post from Fusion IQ stating market bottom. The only Fusion thin I remember was the second sell call on BAC.
January 19th, 2009 at 1:29 pm
I brought my car in this past weekend for a new headlight, local Merc. dealership, was completely dead, I asked a young kid working the floor if they were selling anything and he told me he was going to lose his job if he didn’t sell something before the weekend was out. Doubt he made it as he was reading the paper when I asked him.
I was there for about an hour and I didn’t see one person outside looking at a car and nobody came inside either. Service department was loaded though. Every single sales rep in there asked me if I was looking for a car. It seemed like complete desperation to me. They aren’t making any money replacing light bulbs.
January 19th, 2009 at 1:39 pm
Just because a market hits “bottom” (only ascertainable in hindsight) does not mean it must then go up anytime soon. For example, it was until after WWII that the Dow finally retraced its steps from the crash of ’29-’32 to finally sustainably exceed its pre-crash high, and the same obtained from the early ’60′s to 1982–nearly two decades to recover in each instance. While we are all dead in the long run, it’d be nice if a risky investment in the stock market (as opposed to bonds/cds) could be expected to return something more than zero over the course of two decades.
Otherwise, Dead Hobo is dead on. Evaluating market fundamentals in this environment where the accounting is shit, the banks are insolvent, the information is instantaneous (but lousy) and we have a federal government with a new economic program everyday, is just impossible.
After the Obama bounce (give it two quarters), look out below. It’ll take that long for markets to realize he’s not a magician, nor a god, nor a saint and is not going to pay their mortgages, but is in fact just one man nominally charged with holding back the sweep of economic history from a frightened but vainglorious people. God help him.
January 19th, 2009 at 1:48 pm
They’re 2-3 days early….
January 19th, 2009 at 1:56 pm
The problem with predictions and analyses like this one is myopic linearity. “The more things change, the more they stay the same,” summarizes an argument for “big picture” cyclical analysis. Toynbee and Spengler both noted 2,000 year cycles and posited that civilizations are subject to life-death-rebirth.
Kondratieff, in his defense of capitalism, noted that excesses are purged every 60 or so years during cycle termed a “Kondratieff Winter,” a time of rampant deflation.
The question should be, “will this be as bad or worse than the Great Depression?” I assert we are in collective denial subscribing to the naive belief that it can never happen again and that somehow more debt will soft-land the global economy.
January 19th, 2009 at 2:40 pm
Ben22 @1:29—
I found the post–it was back earlier than I thought. A friend wants to get back in the market–and I wanted to pass the link on. Thank you.
January 19th, 2009 at 2:48 pm
Dan,
No problemn.
Hope your friend is careful because, baby it’s cold outside, of course he/she might mean the bond market, but I doubt it.
January 19th, 2009 at 3:00 pm
Hey Dead Hobo,
I’m trying to downsize and am looking for a roommate:
http://i.gizmodo.com/5134222/5000-paper-house-is-the-worlds-swankiest-hobo-pad
You in?? We’ll flip for top bunk!!!
January 19th, 2009 at 3:26 pm
Personally, I would tend to look at PE as an expression of hope/expectations, and while I suspect that it continues to decline for 6 months or so after a major turning point (a.k.a. “bottom”) has been reached, it seems that we remain stubbornly on the high side of the historical PE ranges, amid the worst (deepest & broadest) cratering of corporate financial performance that I have ever seen. We seem destined to have wave after wave of bankruptcies, even with the Fed continuing to bail out the largest and most diseased TBTF companies.
Somehow I can’t see any kind of significant bottom while that lie ahead.
Garysavage is correct to 7 decimal places in his assessment.
January 19th, 2009 at 3:45 pm
In ’32, ’74′ and ’81, the 40% fall from trend was enough to bring P/E ratios down to single digits:
http://www.investopedia.com/articles/technical/04/020404.asp.
I’m with Constantnormal and Garysavage on this one.
January 19th, 2009 at 4:00 pm
@Lugnut
Couldn’t agree more. Something major needs to turn positive before we see any meaningful upwards action in the markets. As of now, most indicators are still in a downtrend.
January 19th, 2009 at 4:18 pm
1) How do you draw a trendline on a 1970-2008 chart and then quote a 1932 datapoint?
2) Data from 1970 on are skewed by the biggest stock bubble in history
3) Try this…shows that the Dow would be in its long term uptrend to trade at 4000,
http://www.geocities.com/WallStreet/Exchange/9807/Charts/SP500/Dji200_0710.gif
January 19th, 2009 at 4:24 pm
single digit p/e people,
while I don’t really disagree, and I think we will much lower from here, it’s a bit early to make market calls based on where p/e’s are going to trend, none of us have any idea what the E is going to be.
Take two examples from recent,
MON vs. INTC
or perhaps JPM….
This week will help some of this but it’s too early to be talking about market direction when the E is such an unknown.
January 19th, 2009 at 7:46 pm
Curmudgeon
One of the things people always forget is it did take till well after WW2 for the DJIA to get back to the all time high. But I only know of a couple of funds available in the 20s bot two of them Pioneer and Massachussetts investors Trust returned to their initial deposit level in October of 1929 by the end of 1935. Now I know no one would be happy if their investments took six years to get back to their original deposit amount but that is what happened. A 20k investment in those funds (10K each) was worth 290,000 by the time the DJIA returned to its pre 1929 level.
In a word Dividends.
What do you think right now. How long before we get back to where we were. My question is when do dividends become big enough to go back in comfortably.
January 19th, 2009 at 10:57 pm
toneybrooks@1:56 pm
I think you’re on the right track thinking about the K-Wave. However, I’ve seen many people, recently, suggest that we’re in the final deflationary spiral of the K wave. I don’t think this is the case. Maybe I’m misreading your post….
The K-Wave seems to have bottomed in 1998, when wholesale prices really hit the skids (Crude=11 bucks) We began the big 30-40 yr inflationary phase in 1998. What we saw between 1998 and 2008 was the first phase…the initial hint of some serious inflationary pressures, which of course led to our first serious recession/depression in a long, long time. When this second leg down (the ‘adjustment phase’) plays out, we should see one of the more serious bouts of inflation we’ve ever seen.
I’m not saying go out and buy Gold and Oil right now…timing is everything in this game. But, I would suggest that when the S&P is trading 600 ish this summer, it might not be a bad idea to start scaling into some grains/oil/gold etc…harder assets.
- AT
January 20th, 2009 at 5:53 am
@SB 4:18 PM
That is one scary chart.