The Next Leg Down?

landis, did you trade at the mid-am in the late 80's ?

bgp

 

The Next Leg Down?
This is her other leg as she gets out of my bed.

 

No more legs down. Dow going to 11k by end of year and then 14k by Dec 2009. either buy now and make money or sit on the sidelines like a loser.

 

I had mixed feelings about what could happen next week until shit trad3r chimed in. Thanks for the heads up -so we are definitely coming off then...

 

I'd be very careful re: expectations, at least medium to long term. Short term anything's possible for a day or two. For your consideration:

I've been studying the chart of the Dow during the period of 1929-1933 and seeing how what we've been going through this year has mirrored that. Thus far, the parallels are impressive.

In mid 1929 the Dow peaked at 381.17, then crashed in late 1929 to a low of 198.69, a 48% decline from the peak that year.

In mid 2008 the Dow peaked at 13191.49, then crashed in late 2008 to a low of 7392.27, a 44% decline from the peak this year.

From the end of 1929 to mid 1930, the Dow proceeded to have a monster bear market rally back to 294.07, a 50% gain from the 1929 low. It then resumed its decline, closing out the year at approximately 160, breaking below the previous year's low and a 58% decline from the 1929 peak. From there over the next 2 years it continued falling, finally bottoming at 41.22 in 1932, an 89% decline from its 1929 peak.

If the parallels continue, a 50% gain from the 2008 low would take the Dow back to 11300 or so by summer 2009 before resuming its downturn. It would then move back down to the 5500 area (assuming a similar 58% decline from the 2008 peak) by the end of 2009 and continue declining.

And if the parallel is truly valid, that would put the Dow at the 1430 area sometime around 2011 (an 89% decline from 2008 peak).

Will these parallels continue, and the bear market rally rages on for another few months and few thousand points? Who knows. But just remember the old adage, the market can remain irrational longer than you can remain solvent. Bottom line, don't trade what you think will happen, trade what does happen.

 

The issue is what is the next direction: up or down?

 

What took you so long?

 

It is not surprising to see the stock market react similarly to a huge asset bubble in our economy. Debt/GDP ratio in the 1920s and 2000s were equivalent, as individuals and corporations borrowed like there was no tomorrow - and then the bust.

However, followup to the piercing of the asset bubble is completely different now than it was in the 1930s. In the 30s, the government stood by and did nothing as money supply contracted and banks failed left and right. Clearly, this time around, the government is doing the exact opposite. The overall effect is unclear. It could be that we begin a very mild expansion - or we can ignite hyperinflation. All this depends upon the velocity of money.

At this point, I would bet on mild recovery, with mild inflation, since I don't think that individuals are going to go on a wild spending spree anytime soon - and government programs will be only mildly expansive. So, I am hypothesizing a 50 - 67% retracement to about 11500, and then the market bouncing around within a trading range for many years thereafter. More like the period of 1976 - 1983.

Rich

 

Thanks for the history lesson...it truly is sobering to see those stats. It is also true that history tends to repeat itself.

I wonder then how commodities will fare? What did they do during the 1929-32 years? Since people tend to fly to ' real assets' like real-estate, gold, commodities, is it possible we could see another rise in these sectors if the market keeps going down?

This year when the bubble was high -what was the mentality for that? A lot of news people said it was ' speculation' why gas and POT was soaring among others. Speculation of what? A pending recession? So if you are in a depression the opposite is true?

Okay if all value falls during a depression....even hard assets it still seems to me the point of wisdom is that hard assets are still better to own than paper. Gold, land, commodities, steel, farming, food, gas etc. Remember after the war when in Germany people had to cart wheel barrels of Deuchmarks to buy a loaf of bread ? Bread was the winner there.

Any thoughts?

 

Very interesting post zboy. I believe we go lower but not before a serious retracement. I had no idea it could last so long. Redemptions may or may not stop this rally. I am cautiously long until it begins to sell off. Thx for info