Saturday, August 22, 2015

I Don't Think It's Over

The 531 point drop in the DJIA yesterday set off a lot of hand-wringing among the chattering classes.  The DJIA is down 10.1% since its May high, meeting the technical definition for a correction.  Barrons points out:
It wasn’t just the Dow that got hammered today. The Nasdaq Composite fell 3.5% to 4,706.04, while the S&P 500 dropped 3.2% to 1,971.10. The small-cap Russell 2000 declined 1.3% to 1,156.79. The S&P 500 is off 7.5% from its all;-time high, while the Nasdaq is off 9.8% and the Russell 2000 is off 10.7%.

This week alone, the S&P 500 lost $1.1 trillion of value. As S&P Dow Jones Indices’ Howard Silverblatt put it: “Ouch.”
You can find any economist you want willing to say this is just a hiccup and it will recover, or that it will get worse.  For my two cents, I don't think it's over.  A 20% correction down to 14630 is not only not out of the question, it could well be the best case scenario, as I will explain.  (I recall telling Mrs. Graybeard we'd see Dow 16,000 by the end of this month, but I don't seem to have written it down anywhere).  In 2014, I posted these words from Seeking Alpha, quoting Andrew Lapthorne of SocGen.
"The number of 1% down days for the S&P 500 in any given year has averaged 27 since 1969; the S&P 500 has seen just sixteen 1% down days over the last 12 months. It has now been 468 days since a market correction of 10% or more, the fourth longest period on record, and, as we show below, the annualized peak to trough loss has only been 5% compared to typical annual drawdown of 15%."
The last time we had a 10% correction was in October 2011, about 1400 days ago.  A 20% correction would be like a reversion to the mean, which some think we're overdue for.  The concept of reversion means the longer something remains an outlier, the more likely it is to revert back to the average.  In this case, it means the longer US stocks go without a meaningful correction, the more statistically likely a meaningful correction becomes.  A 20% correction meets the definition of a bear market and would certainly be meaningful.  It would be bad but nowhere near as bad as it could be. 

In the articles which I've been cautioning about a possible snap back coming this September/October, like the last one, I've been referring to this graphic from my 2014 post.  There's one little difference here: I put a red mark near where we are today.  I say "near" because the May record high was off the top of this chart, and the chart was bad enough to start with!
What this chart is showing is that since the late '90s, the middle of Alan Greenspan's days as Fed Head, the DJIA has been in a diverging wedge pattern: setting higher highs and lower lows.  Twice before, when it hit a new all time high, there was a snap back to a new lower low, and that was in the second year after that previous high.  Back in 2014, I was looking at that pattern and saying the previous all time peak in 2013 will lead to a snap back, probably in September or October of this year.  The target for that snap back (lower line) looked to be 6000.  Dow 6000?  There would be blood in the streets.

Has the new higher high invalidated this; that is, did it just set the snap back further into the future - and predict a lower DJIA of around 5000?  I. Don't. Know.

Notice this doesn't have anything to do with anybody's prophecies, or anything that the extremely atheistic will dismiss as "religious nut job" stuff.  This is pure technical analysis.  Read the indicators.  This doesn't require sheep entrails or any other divination, just pattern recognition, knowledge of the markets and stuff taught in any technical analysis seminar or class.  Reversion to the mean can be a nasty thing; some say that's what Greece's problems are.  The problem is that it's the least nasty of these possibilities. 


  1. The numbers from the markets these days are more an indicator and less a direct measurement of reality. That's because the real world
    economy and the stock market haven't really been connected for years.
    For quite a while now the stock market has merely been a shell game, an electric version of three card monte style schemes that exist to separate the gullible from their money run by people who know what's coming and when so THEY make money while the average investor always loses. So while the 'correction' is a matter of some concern many people will hardly least for a while.

  2. I remember back in 09 when the Dow was at about 6500, people saying that it was still overvalued by about 50%. Back in 29 the Dow peaked at 381, it took about three years to find bottom but when it did it was at 41, a loss of roughly 90%. Not hard to find predictions today that the coming crash will make 29 look mild by comparison.

  3. The Dow has long since lost its usefulness as a barometer of anything. Let alone divining the future.

    Yes. It is more volatile. That is more a function of how it is computed than anything else.

    And yes, we are in the midst of a correction. The last time the technical analysts and associated nay-sayers were calling for "The Great Depression 2.0" was in 2011. Seems like it didn't happen then, and the housing and manufacturing data isn't pointing that way.

    The Chinese markets went up 100% - fueled almost entirely by borrowed money - and then came back 30%. (May be more than that by now.) All the sheep screamed, the usual suspects cried that the sky is falling, and the other usual suspects predicted the great depression.

    Sorry, but I'm not falling for it.

    And in case you think I don't know what I'm talking about... How many of you retired when you were 45?

  4. "The last time the technical analysts and associated nay-sayers were calling for "The Great Depression 2.0" was in 2011. Seems like it didn't happen then"

    Here is where your rationalization is incorrect: If the government were not printing close to a $ trillion a year and borrowing close to a $ trillion a year since 2009 than your arguement might be more compelling. If the FED had not kept interest rates at or near 0% since 2009 than you could argue that we are in an actul recover. If the real unemployment rate were 5% and not in the mid 20's than I too would agree that we have a recovery. If 50 million Americans were not on welfare perhaps you could argue that we have recovered from the recession/depression.
    The list of phony data that supports the dream of a recovery is long indeed. We have not recovered what we are doing instead is borrowing and lying so that the politicians in office can continue to stay in office instead of being hunted down and guillotined by the citizens. We have postponed the inevitable. We live in a make believe economy. It will collapse (has collapsed) and because we printed and borrowed so much the collapse will be so much worse than it would have been if we simply allowed the free market to take it's course. We are like the man who jumped off the top of the Empire State Building and was heard to say as he passed the 10th floor "so far so good".
    Time will tell. But make no mistake when the dam breaks there will be a flurry of activity by those in power and the MSM to make it seem different than it really is. It will be blamed on some fall guy, some newly elected president or chair of the FED or anyone other than the Barny Franks who created it. When it happens it will seem to be some "new" and sudden problem unconnected to anything in the past because after all it "Seems like it didn't happen then, and the housing and manufacturing data isn't pointing that way"