November 8th, 2008

Nightmare with a Scary Ending

One of the posts with the greatest number of hits (followed by the ones in which I took Cramer to task for touting what he continually claimed was the accuracy of S&P’s Oscillator to mark the market’s bottom on February 15, May 24, June 13 and, finally, on August 6 ) was “Lessons From Past Crashes and Recoveries Out of Them” of October 24. The post was referred to a number of other blogs both here and overseas; there was a surprising amount of interest from French bloggers.

It seems that others are now taking up the search for historical precedents for a guide to what we’re facing now. Is 2007-08 like 1972-4 or more like 2000-2003 or 1980-82? Or are we facing the something similar to the granddaddy of them all, 1929-32 with its 80% decline? I wasn’t able to find a comparable chart of The Crash when a reader asked but, with the increased interest I located one:

The chart is from the Elliott Wave people by way of where they conclude: “Here in 2008 we have now seen the extremes of a -34% fall followed by most recently a +22% rally. I find it hard to believe that is the worst we will face.”

With the recent 18-20% volatility, the market is currently at a crucial juncture. For example, last week’s back-to-back 5% declines following the election goes into the record books. As documented by Bespoke Investment Group, here are others, many of which happened near bottoms:

We’re bouncing between 840 and 1000 (quite a wide range, I might add). In “Fairy Tale with a Happy Ending“, I outlined the “glass-half-full”, optimistic story. It would be only fair and honest if I presented the Nightmare with a Scary Ending picture, too. But I can’t do it for two reasons. First, it is too scary and frightening to think of the S&P 500 dropping another 30-40% from these levels to the mid-600’s. Second, I just can’t imagine that happening.

One which side do you fall?

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