February 7th, 2010

Thailand and Ruble Then, Greece and Euro Now

Everyone seems to be looking at historical precedents for gauging the severity of this correction. When the Great Depression was on everyone’s mind last spring, many used the1933-35 recovery to benchmark this Financial Crises Crash recovery (see “Two Market Consolidation Models” of Sept 30, 2009). As we crossed the neckline of the inverted head-and-shoulder bottom, I looked to the 2004 nine-month correction from the dot-com Bubble Crash as the model of what this correction might look like. A fairly compelling case could have been made for either.

However, since this correction has been so severe and so fast (in 12 trading days already reached the extent of the 2004 correction, down 7.4%), I continued combing the long-term S&P 500 chart and discovered something I’d completely overlooked before:

The market twice before had 20+% short, severe moves over the past 12 years, both times down from around 1150-75 to 950 in a matter of weeks:

  • 1998 Russian Financial Crises and LTCM Collapse
  • 9/11/2001 World Trade Center Terrorist Attack

We remember the 9/11 tragedy in the midst of the dot-com Crash; it can’t be called a correction. But the 1998 crash is another matter. The Ruble financial crisis hit Russia on 17 August 1998 was triggered by the Asian financial crisis, which started in July 1997 [in Thailand]. During the ensuing decline in world commodity prices, countries heavily dependent on the export of raw materials were among those most severely hit. Petroleum, natural gas, metals, and timber accounted for more than 80% of Russian exports, leaving the country vulnerable to swings in world prices.

Russia’s default on their bonds triggered a major crises in the US with the collapse of Long-term Capital Management (LTCM):

“…..in 1998, Russia defaulted on its bonds- many of which Long-Term owned. This default stirred up the world’s financial markets in a way that caused many additional losing trades for Long-Term. By the spring of 1998, LTCM was losing several hundred million dollars per day. What did LTCM’s brilliant financial models say about all of this? The models recommended waiting out the storm. By August 1998, LTCM had burned through almost all of its $4 billion in capital. At this point LTCM tried to exit its trades, but found it impossible, as traders all over the world were trying to exit as well. With $1.2 trillion dollars at risk, the economy could have been devastated if LTCM’s losses continued to run its course. After much discussion, the Federal Reserve and Wall Street’s largest investment banks decided to rescue Long-Term. The banks ended up losing several hundred million dollars each.” [from “When Genius Failed“]

And what did the S&P 500 chart for 1998 look like?

The great bull market of the late ’90’s came to a severe bump in the road in the fallout of Thailand and Russian monetary crises. It would be ironic if the current market recovery similarly paused due to the Euro crises from Greece, Austria, Spain, Hungary, et al. Market top then around 1150 – same as recent top on January 19. Bottom at 950 four months later – same as neckline of inverted H+S bottom in June.

History may not repeat itself but it surely has echoes. One thing that’s certain, at least to me, is that Friday’s bounce was encouraging but totally unconvincing. I’m betting on a bottom again around that 950 neckline.

Subscribe below or click here to learn more about help for navigating turbulent markets.
  • Anonymous

    Guru,,would you share your views on the work done over the yrs by Tom DeMark ?Both of you have my respect .

  • Joe

    I'm flattered to be lumped in the same sentence as someone with the stature and reputation as Tom DeMark. I'm not sure it's warranted but I am honored.

    I'm not familiar with the TD Package of technical indicators but from what I've read I'd have to say that DeMark has attempted to brand, codify and make mechanical what, to me, is a subjective and creative process.

    Where DeMark and I differ is that, coming from the perspective of institutional investing, focuses on trying to anticipate market turns and I, coming at it as an individual investor, focus on following the trend.

    DeMark was interviewed in April, 2007 in Futures and Options Magazine. On reading that interview, the difference in our approaches become obvious.

  • Anonymous

    watching us $$, should go down from here…

    http://www.bloomberg.com/apps/cbuilder?ticker1=DXY:IND

  • Anonymous

    guru, what is your take on dollar?..it looks like should go from 80 back to 76, then go up again??

  • Joe

    You must be looking at same chart as I am. Temporary rest but perhaps not that far back.

  • Chris

    guru … do you think the Greece situation will become as dire as the Russian situation? do you think the proposed EU bailouts will solve the problem in Greece? the markets seem to have steadied since the news of bailouts broke last week, but all it will take is a bad headline out of Europe to send them further into a tailspin IMO … the correction might not be over … we shall see … thanks, Chris