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Because I am not following the market as closely these days, I am more comfortable presenting longer-term analysis. While this may not be overly helpful to short-term traders, it does help put some perspective on the market. For longer-term investors, I don’t believe there is any rush to put money to work. Let’s take a look at a long-term monthly chart of the Dow. I’ve added a (50,3) Stochastic study, which does a good job of filtering out market noise to show historical overbought and oversold conditions.
Notice how the monthly stochastic just moved into oversold territory last month. Consider that during the Geeat Depression, the stochastics remained in oversold territory for 48 months, from November 1930 to October 1934. Of course, there is no guarantee that this will be a repeat of the Great Depression, and it should be noted that the market usually bottoms well before the stochastics move out of oversold conditions. My point in showing this chart is that there appear to be further declines ahead. If the market were to stabilize and move higher from here, this stockmarket declilne would represent one of the tamest dips into oversold conditions in history, a trait highly unlikely for a market that has declined at such a furious pace over the past 14 months. Not to mention the deteriorating economic conditions and crisis in confidence.
This shorter-term monthly chart shows where we are in relation to the tech bubble bursting. You can see that the Dow still holding above 7500 and the stochastic is just dipping into oversold territory like it did in September of 2002. As bad as things feel, we are no worse now than we were in 2002. The question is, how much worse can it get? I expect the next 4 years to look a lot more like 1931-1934 than 2003-2006. What say you?
2003-2006 was fueled by a bubble in the housing market, and in the derivatives market. And it’s really hard to see another bubble reappearing in the next 4 years. I see a 1931-1934 scenario but is less dramatic to that extent. We have to absolutely break 2002 lows at some point, those lows can’t hold, it makes no sense. The economy is in much worse shape than it was in 2002, it’s really a matter of time until the blue chips and other sectors follow the financial sector to a recessionary outlook. I highly doubt we’ll reenact 1931 though, probably looking at a recession that is twice worse than a regular one, but that’s about it.
December 21st, 2008 at 4:25 pm
I agree with your outlook. This may not be as severe of a fall as we saw during the Great Depression, but it would not surprise me to see it last as long or close to it. It will take time for the psychology to shift from “stocks are cheap” to “I won’t go near stocks”.
December 21st, 2008 at 5:23 pm
Typically bottoming processes take several months, while the decline lasts several years. We are predicting a decline of several months and a bottom of several years. Doesn’t make much sense to me. Then again, we could be in a market in which we haven’t seen before which is scary. The ending of one of those grand supercycles in EWT I believe its called.
Its tough to judge the long term because we’ve gone down so hard and so fast. We haven’t had many positive months so the indicators are getting hammered. At the same time, one has to think…. with such a fast move we could either 1) only be on our way to another giant move lower in which the decline is still continuing, or 2) Bounce back just as quickly (in relation) as the market has fallen.
December 21st, 2008 at 5:28 pm
As I said in my previous posts, I am anticipating a Wave 4 rally that has either already started or will start in the next month or so. I expect the rally to last several months but be more of a sideways grind higher than a momentum-driven push. It is Wave 5 lower that I think will be the longest and most depressing of the Bear Market. It will wear away at bullish sentiment more through time than price.
December 22nd, 2008 at 7:37 am
Craig, the end of intermediate wave 5 only represents the end of Prmairay wave 1 down. Primary 2 should be another extended rally and then Primary 3 wave will be another 5 wave move to even greater lows. Then Primary wave 4 (most likely a huge protracted sideways move and then Primary wave 5, yet another 5 wave move down.
Only then will the bear market be over. EWI projects anywhere from 2014-2016.
A full 14-16 year bear market.
It is at that point when the sentiment will be truly “The stock market is dead, don’t go near it.”
December 21st, 2008 at 6:12 pm
I wonder why nobody takes it seriously that this recession could be worse than Great Depression. People seem to think we’ve transcended economic reality.
Gerald Celente, CEO of Trends Research Institute, made some eye-opening points:
1. Back then we had trade and budget surpluses, not anymore
2. Back then, most Americans rented, so there were no McMansions, home equity loans, property taxes, insurance that is going to be wiped from the earth.
3. Back then, no such thing as credit cards.
4. Back then we had a manufacturing base that rebuilt world after WWII
5. Back then we didn’t have $10 trillion of national debt.
On top of all this, printing more money and creating govt jobs isn’t going to solve the problem, only compound it.
Highly recommend you listen to this interview:
http://www.lewrockwell.com/podcast/?p=episode&name=2008-12-14_084_gerald_celente_2000_gold_and_the_break_up_of__the_us.mp3
December 21st, 2008 at 6:05 pm
I agree with both of you that the bad days are far from over. When even Toyota has a red year (its first ever in 60 years), a lot has to happen before happy days are here again in the USA. Things may never return to what they once were. We already coughed up more money in inflation-adjusted terms than we spent on WW2, and the inflation numbers have been cooked for at least a decade, but we are nowhere near bailing out everything that will scream for it.
We do have things going for us that western Europe lacks:
(1) Our population is younger, by something like 15 years. What youth and vigor comes into European economies is messily intertwined with (2) below.
(2) We have our differences, but nothing like the problems with radical Islam that Europeans face. European politicians often have no hope of being elected unless they go along with stuff more to the taste of the Taliban than post-war democractic ideals. The most common name registered for male babies in many large European cities is Mohammed.
I hasten to add that my life has been, and continues to be, much enriched by close friendships with many Muslims, especially among colleagues and students. They are appalled by what radical Islam does, just as I am horrified by some white extremists in this country.
(3) Our resource-rich neighbors in North America may not always exactly love us, but they can work with us, and we with them, in a history of peace and trade that goes back over 150 years. The Europeans? They have Russia, already shutting off the gas if it doesn’t get its way. The Germans and Dutch want their nice hard D-marks and Guilders back. Who can blame them after watching Italy, Spain, and Portugal give even us lessons in how to run up deficits and debase currency?
Ultimately, we will come out of this mess better than most. Almost every American is either someone who resolved to struggle out of some messy situation somewhere else, or is descended from such people (and only from the ones who succeeded). We have a fantastic capacity for invention and cooperation, and few of us have much respect for “we’ve always done it this way” or “nobody ever did it that way before” as reasons to eschew innovation in industry (or the boudoir). I probably won’t be around to see it, but it almost seems like we need times like these to make us get our act together again after we — temporarily — lose our way.
Then the machines take over and wipe us ALL out. Doesn’t anyone realize that the Predator is Terminator Zero? The military is already talking about self-activating modes and such. Jeez.
Ho Ho Ho
December 22nd, 2008 at 1:19 am
Uner, Nice post. I enjoyed it.
December 22nd, 2008 at 9:36 am
Well stated
dont we have uncle same fueling the next bubble for the upcoming years
Feels funny that California is leading us in the last couple bubbles. Could it do a troika? Alternative energy? Alternative agriculture?
How can we possibly have a stong Wave 4 rally soon when the weekly chart show no Bullish divergence and is finishing up a textbook Bearish Pennant?
Either Wave 4 is done or Wave 3 isn’t!
http://social.stocktock.com/photo/photo/show?id=2348194%3APhoto%3A9558
massive indebtedness at all levels have propelled the price of all asset classes,
we are experience a contraction in credit at the personal level, but i think it will inevitably become a contraction in credit at the country level. when other countries become unwilling to purchase our IOU’s, interest rates will want to rise…a choice then between deflation and inflation will face the fed’s ….inflation will me the more appealing in the short run…politics as usual…
we live in a state of mass denial by most of the media, politicians, citizens….when denial wanes and reality sets in truly – the depression will be here.