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A chart that you don't want to miss



January 21, 2009 – Comments (24)

I'm not a big believer in technical analysis or charts, but Barry Ritholtz posted an outstanding chart in his "Big Picture" blog yesterday that anyone who hasn't seen should definitely take a look at.   The data series that was used to create the chart spans an incredible 137 years.  After the recent carnage in the market it appears as though we are just back at the level that the long-term trend indicates we should be at.

Unfortunately, as you can see from past recessions the markets never just lands softly and falls in line with this level.  Markets usually overcorrect, sometimes dramatically, before reverting to their historical trend level.  Using history as a guide, it appears as though we may still have a ways to go before we see the bottom in the S&P 500 and other major indices.  

The fact that the markets have already fallen by X% doesn't mean that they won't fall further.  The high that the S&P 500 hit during the latest bull run was an astounding 152% above the historical trend line.  This is more than twice the bubble that was created in 1929.  Things clearly got ahead of themselves.

My fear that we haven't seen the bottom of this bear market yet is why I have been limiting my purchases of any new investments to common stock in companies that pay solid dividends with low payout ratios and lately to things even higher up the ladder like preferred stock and bonds.  I have been looking for things that pay anywhere from 5% to 10%, but I have made exceptions on both the upside and the down side for certain opportunities that I find attractive. 

I am happy to lock in near 10% annual gains in my portfolio and not worry about any sort of capital gains.  I plan to keep averaging into the markets for a long time to come.  Eventually we will find a bottom.  Where it is difficult to say, but I am being conservative in my investments looking for yield, diversifying, and sticking to companies that trade at low multiples, P/E ratios of 15 or less and ideally of 10 or less (I realize that there is more to valuing stocks than the P/E ratio, this is just one of the things that I look at.  Cash flow and payout ratios are more important to me in this sort of environment).

I look at investing as a must.  I can't count on anyone to take care of me in my family when we get older.  The odds that Social Security will be around when I retire are practically zero.  Even if it is around, it is entirely possible that there will be massive inflation then that render its payments severely inadequate, as if they weren't already.  Saving is necessary to protect myself and my family and if I am going to save, I need to see some sort of return on my investment.  Treasuries yielding 1%, 2%, or 3% just don't cut it.

As bad as things feel right now, the market will eventually bottom.  Anyone who buys stocks near the bottom will profit handsomely.  Absolutely no one knows when this bottom will occur.  It is entirely possible that it won't happen for a while.  I will continue to invest on a monthly basis for the foreseeable future and I will eventually be rewarded.  In the meantime I will be getting paid to wait for things to get better.


24 Comments – Post Your Own

#1) On January 21, 2009 at 10:53 AM, Gingerbreadman55 (27.14) wrote:

I also am not usually a big fan of technical analysis, but this is great stuff. Thanks for the relay


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#2) On January 21, 2009 at 11:08 AM, goldminingXpert (28.77) wrote:

nice chart

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#3) On January 21, 2009 at 11:11 AM, abitare (29.62) wrote:

Good chart. But it ignores the rise of Asia, which is now competing with the US. Plus, the US debt is not show, at some point there will be a default and the credit will stop or become to expensive to the US.

I will be going back in the market after the China recession has passed.  I will be a China buyer and not likely to invest in the US unless there are double digit dividends like are paid in Asia. You also have to address the US dollar as the Reserve currency status, will it stay or go?

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#4) On January 21, 2009 at 11:12 AM, anchak (99.89) wrote:

Deej.....Was this taken from Dshort?

Actually a lot of fools ( dwot, tasty) drew my attention to this site...which is trying to come up with a running commentary of this crisis - from a technical ( more like graphical) perspective.

Here's the alternate chart: INFLATION ADJSUTED

However, I am on the group who thinks S&P can move down because of its P/E ......there is a possibility of downward revision of both the P and the E

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#5) On January 21, 2009 at 11:14 AM, anchak (99.89) wrote:

Lets see if the embed works


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#6) On January 21, 2009 at 11:15 AM, Gemini846 (34.75) wrote:

What do those percentages mean in theory for the current SPX? 200-300 points down?

Also is that a subscriber blog, or do you have a link?

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#7) On January 21, 2009 at 11:55 AM, angusthermopylae (37.46) wrote:

There's a couple of good lessons in both charts:

Lesson #1:  The Fool's basic tenet is correct:  Over time, the market does rise.  The corollary, of course, is that you may be an Alzheimer's patient or dead before is gets back on course if you're born at the wrong time (e.g. 1931-1951 ).

Lesson #2:   Listen to the chicken littles; the faster things improve now, the worse they will be later (peaks at 1929, 1966, and 2000 followed by significant troughs).  The corollary is that nothing lasts forever--good times or bad.

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#8) On January 21, 2009 at 12:00 PM, philippalmer (91.86) wrote:

I am going to have to say I like the looks for the inflation adjusted on e better.  Anyway, it does seem that we will be headed down a little further.  I am, like most of you, going to keep my regular investing every month and wait for this bloodbath to pay out handsomely. 

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#9) On January 21, 2009 at 12:02 PM, oldfashionedway (33.94) wrote:

Another nice find Deej.      With excellent addition from anchak.

So which chart do we use for the best analsys?  I would put more faith in the alternate CPI data which suggests we are well below the trend already.

Would it be an over simplification to propose a loose correlation of the peaks to a generational cycle of +/- 40 years?  My gut tells me we still have a long way to go.

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#10) On January 21, 2009 at 12:49 PM, vmh104 (< 20) wrote:

Honestly the notion behind the interest for these charts is that the past determines, or predicts the future. This is just not true. It's not true when you roll dice. It's not true with the markets. The markets are determined by the factors that impact the economy. The problem is that there are so many convoluted events impacting the economy that it's difficult to predict. However there is one thing I can say with absolute certainty; past economic performance has no impact on future economic performance. They are unrelated.


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#11) On January 21, 2009 at 12:50 PM, EnigmaDude (51.43) wrote:

Just goes to show how you can make charts and stats show whichever version of the "truth" that you want to show.

Oh well - I like your approach to buying dividend stocks while we wait to see what really happens.

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#12) On January 21, 2009 at 12:52 PM, kdakota630 (29.04) wrote:

vmh104, the charts provide perspective, not direction.  The more knowledge you can derive from history, the better decision one can make now.

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#13) On January 21, 2009 at 1:02 PM, pete4357 (99.74) wrote:

EnigmaDude, I agree. Surely the line should go where the area above the line is equal to the area below the line? Since they are looking at the same index and the same time period, why aren't they showing the line in the same place on the graph? Does anyone understand this?


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#14) On January 21, 2009 at 1:26 PM, ETFTimer (< 20) wrote:

Any long-term forecast depends entirely on where the trend line is drawn, and it's not clear that any one way of picking an average trend is better than any other.

I think a plot of of the average P/E ratio or dividend yield would more clearly show where stock prices "want to be." For instance, the yield of the S&P 500 or Dow historically ranges between 3% and 6%. We're close to 3% today, so that opens the door to another 50% drop from here, which would result in a 6% yield.

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#15) On January 21, 2009 at 2:15 PM, TheGarcipian (33.76) wrote:

Deej, good chart. I've seen it before and have used it (and others, like the Coppock Curve) to get a feel for just how bad this thing's going to get.

A word of caution to vmh104:  while you may not be able to predict the time and the day of the "bottom", such charts are good for seeing broad trends. Investors, like consumers and like businessmen, move in herds. Psychology plays a bigger role in the marketplace than most people will give it credit. Trends & technology drive each other. It's wise to pay attention to these but not put all your faith in them either.

I think both anchak and ETFTimer are correct. The "P" and the "E" will continue to drop for a bit longer. I don't have time to look up the market's current P/E, but a month ago it was still at 14 or 15 or so(?), too high for a "bear market". From the charts & tea leaves I've been reading, I think we'll see the DJIA fall to below the 7500 level (at least) and probably the 7200's, if not worse, before we're done with this downturn, which I expect to last (if we're very very lucky) until 2010. At worse, this drudgery could go on for 3-7 years. In the end, I think we'll see a percentage drop that'll be worse than the 1929-1932 percentage drop. Investing in 2009 is going to be very tough, so buying stocks with excellent dividends is the best way to go from here, IMO. And buying gold outside the USA, like TMFSinchy's been preaching for awhile...


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#16) On January 21, 2009 at 3:51 PM, kstarich (28.89) wrote:

Need some advise.  I sold 90% of all my stocks in Sept.  I put 1/3 in 18month CD, Dec. 4th bought physical metal when it dropped and the rest is in money market.  Still employed keeping the cash flow going but would like to hear suggestions what to do in this market.  So much talk of shorting  is this the consensus? Or dividend stocks, if so some suggestions would be great.

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#17) On January 21, 2009 at 6:09 PM, SideShowMel0329 (32.92) wrote:


Sell the metal immediately. It's overbought and you'll get better returns buyinig a well-known, cash heavy stock trading at bargain prices.

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#18) On January 21, 2009 at 7:19 PM, TMFKopp (97.84) wrote:

As was mentioned above, the "usefullness" of this really depends on how you draw the trend line and where you start and stop the data (not to mention how you adjust the data). A slightly different trend line could show the 2000 peak as not nearly as above trend and the downturn already well below the trend line.

Also, I know we can only deal with the data that we have, but trying to read too much from three past observations is dicey at best. Simply looking at the shape of the peak and trough of the three past cycles shows that there's really nothing typical about these movements except that they go up and they come down.

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#19) On January 21, 2009 at 11:07 PM, falang1 (< 20) wrote:

 ETF Timer,

Here is a link to some charts including the dividend yield one you were looking for.  It is down the page a bit.  This guy has some good stuff and his conclusion is we will fall until we get near the 6% line as you said.  Sorry hyperlink not working.  Copy and paste.


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#20) On January 22, 2009 at 12:42 AM, Tastylunch (28.61) wrote:

Nicely done deej, easily deserving of the 40 some recs you've gotten

Anyone who buys stocks near the bottom will profit handsomely

I agree and disagree with this. While I suspect we may see significant rallies in the future that invetsors will profut handsomely from  I think in this case there is another question an invetsor must ask him/herself

That question is whether America will remain the predmoninant eocnomice power and thus consquently preeminent market in the world after this over. That is the underlying assumption in all these regression to the mean charts that the fundamental trend will remain upward. If we won't be and are truly declining which I think is a very real possibility (but unknown at this point) considering the amount of Debt the country has, then we may see a Japan scenario where the market never recovers the old 07 highs in our lifetimes.

Personally I think this is going to be a position trader's market for years and that's how I'll probably treat it.

To go long fulllbore the market again for more than or so I'm waiting to see the 50 day ma average finally cross the 200 day ma  ont he S&P, it could be awhile. 

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#21) On January 22, 2009 at 9:31 AM, XMFSinchiruna (26.58) wrote:


Hold that physical all the way through this crisis, and don't think about selling it until gold is over $2,000 at least and calm and order are returning to the market. A return to the market, and I do think there are sectors that can work going forward as long as one selects with great care, should be done with the money market portion, IMO. Hopefully, things will look clearer when your CD expires. Nice job socking it away at an opportune time.

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#22) On January 25, 2009 at 12:34 AM, bostoncelitcs (57.48) wrote:

Great chart.

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#23) On January 26, 2009 at 12:33 AM, SolarisKing (< 20) wrote:

angusthermopylae (52.61) wrote:

There's a couple of good lessons in both charts:

Lesson #1:  The Fool's basic tenet is correct:  Over time, the market does rise.  The corollary, of course, is that you may be an Alzheimer's patient or dead before is gets back on course if you're born at the wrong time (e.g. 1931-1951 ).


Well, not neccessarily. Perhaps that line is the line of the rise of the american financial empire on this planet. And perhaps that empire will, like all the rest of the empires in the history of this planet, eventually lose hegemony. And perhaps that line will never be that high again.

   If i had money, and it's true that i don't, i WOULD NOT loan it to the USA. Nope. I would look for a nice solvent nation and make a long term loan to. . . . Brazil? India?

I don't even know why i'm typing. I don't know anything

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#24) On January 26, 2009 at 12:56 PM, kstarich (28.89) wrote:


Thanks for the reply.  I'm going to take your advise and just sit on the fence for now.  I still own PCU which pays a good dividend, the price has been hammered but I'm going to hang onto it for now.  I may sell CHNG.OB and reinvest elsewhere.  Any suggestions?

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