August 26th, 2008

Lessons from Past Bear Markets

I keep several long-term charts available for quick access: 1972-1976, 2000-2003 and 2006-?. I not a born pessimist and I’m not a masochist. It’s just that you’re not smart when you pick a good stock, you’re smart when you realize when it’s time to sell and you do.

The 300-day moving average takes along time to turn and it’s beginning to do so. Remember, the 300 days making up that average actually covers about a 14 months. What the average turning down means is that today’s Index value is under the average of the prior 300 days … let me repeat that, today’s Index value is less than it was, on average, over the past 14 months. So when the moving average starts to turn it becomes very difficult to turn it around again.

With one exception, this period looks similar to the 1972-74 era in terms of the market, position of the $US, international geopolitical scene and, finally, the US political situation. For those of you to young to remember must read histories of the period, they’re readily available on the Internet. But here’s a picture that speaks a thousand words:

And then, there’s the Tech Bubble Crash and you can see the similarities:

That brings us up to the current market. To those who continually shout we’re at a bottom, look at the moving averages. See the 300-day moving average heading south; it’s going to take a major move up, above the average itself, before it can turn to start heading back up, a true sign of a bull market.

My software, as do most others, won’t allow me to extend the graph beyond the latest data so that’s why it looks as if the current period might be the bottom. But if I were able to project into the future then it would be possible and, I believe likely, the bottom of the scale would expand down to the 900 area, another 20%.

I believe the Index will continue down before an extend period of base building. It might be another six months to a year before a bull market can begin again.

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