May 10th, 2009

Comparing Market Crash Bottoms: 1975, 2003 and 2009

Millions of people (institutions and individuals) continually translate the economic and financial environment here and abroad into sales and earnings growth prospects as the continually look for companies’ whose stocks are they assess tobe undervalued or overvalued and thereafter make decisions about buying or selling stocks.

Our focus, however, will be on the distillation of all these varied opinions into a concrete, market Index, its value today and its past trend. What follows may sound like black magic, hokum, tarot card reading, astrology or secret code but it’s actually a discussion about the trendlines and moving averages that are a shorthand for talking about investor psychology and sentiment as it continually changes.

No one individual knows the future but collectively, in their buying and selling, the investment community votes through their actions on what they think that future might be. All we have to do is try to figure out how those opinions are changing.

I’m looking for confirmation that market momentum has swing from “bear” to “bull”, that the major market trend has truly flipped from moving down to up. But you can’t see a trend when the only recent action is the market going straight up like a rocket. Usually, a run-up eventually loses steam, turns, creates a pivot point and retraces a portion of that run. Trends don’t only have upper boundary resistance line, they’re also matched by lower bounder support trendline. Since March 9 all we’ve had is an upper boundary, no real lower boundary. Thank you in advance for the opportunity of thinking this through out loud with you.

The Index just barely crossed its 180-day moving average; it also did so a year ago … for just one day. I’m hoping this time will be different but may be one of those who seem to be stuck in the recent past and is overly cautions to take full advantage of one of the best bull runs in history (up 36% in two months). First, here’s a comparison of the previous times when the market has crossed above its 180 day moving average:

What distinguishes this bear market from the previous two is that while the decline to the takeout (when the Index crossed back above the 180-day moving average) is similar (each between 30-40%) but this Bear Market was shorter (43% shorter than the Tech Bubble Crash) but more steep with the decline from peak to trough at 54.2%, (20% more than the previous two). But if the market has hit bottom, then we should be looking at the other side.

How does the current recover chart compare with the 1973 and 2003 bottoms?

  • 1975

    The 1974 bottom formation took six months and took the form of a double bottom. The distance between the neckline and pattern bottom was 26% and covered 5 months. Interestingly, the Index matched the distance below the neckline with that above the neckline rise 26% during the next 5 months before retracing back to the 180-day moving average. [Actually, the Index fluctuated around the 180-day nearly two months before continuing its ascent].

    What distinguishes this recovery is that trading volume spiked just prior to the market’s crossing the neckline and continued to be propelled by nearly twice the trading volume.

    Within a month of the Index’s cross, both the 60- and 90-day moving averages turned up, crossed the 180-day moving average. This was happening just as the Index crossed above the 300-day.

  • 2003

    The Tech Bubble Crash also ended in a double bottom formation, this one taking nine months before the Index was able to cross above the neckline; the distance between the bottom and the neckline was 20%.

    What makes this recovery distinctive is that all the repair work was done beneath the neckline. The cross above the 180-day moving average on March 11, 2003 was significantly below the neckline as did the cross of the 60- and 90-day moving averages over the 180-day. The Index actually crossed the 300-day moving average just before it was about to cross the neckline. No significant volume increases accompany this work.

  • Current

    Work with me on this as I try sorting out the future course of this recovery. Accepting that I come at this with a bias, here’s how I view this chart:

    • Rising wedges usually end with prices/values coming out the bottom rather than the top of the wedge.
    • As pointed out at the beginning, there’s a 36% distance between bottom and neckline. It’s too significant a move to sustain a cross of both the neckline and the 180-day moving average.
    • There doesn’t appear to be any significant ratcheting up of trading volume. Furthermore, volume trails off during the summer months. If there’s going to be a significant volume increase, in all likelihood, it will come around Labor Day.
    • The 60- and 90-day moving averages haven’t turned yet and there’s too much of a gap (13%) between them and the 180-day before they can cross. It could take several of months before that cross will occur.
    • The pattern conflicts with symmetry sensibilities; the earlier bottoms were nearly perfectly symmetrical. The symmetry in this base would result from the formation of a right shoulder.
    • Time would allow the 300-day to continue its descent aiming at a convergence and the Index crossing above it around October.

My plan is to wait for the market to drop back to the 800-850 area before more fully shifting my focus from market timing to stock selection. And then again, the market may surprise, cross the neckline and bid its time on that side waiting to converge with the 300-day. I may regret having been so explicit but it’s my feeling and opinion.

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