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TheGarcipian (34.96)

Happy Anniversary! Check Your Pulse: Are We Dead Yet?



October 02, 2008 – Comments (5) | RELATED TICKERS: SPY , SPX

Part III: The Medusa Staredown

“Clear!” – ZAP! – Did you feel that? Are you breathing again? No? I didn’t think so…

As the world is coming down around our ears and bailout wails & woes are heard everywhere, I have little confidence this post will see many eyeballs. But lucky for you, you’ve landed here, so hopefully I can make it worthwhile for you.

Congress, in their infinite wisdom and uncharacteristic synergy, are hooking your economy directly to the defibrillating paddles of circulatory lifeblood, your money. This synergy is especially uncharacteristic during an election year. As they say, politics makes strange bedfellows. I’ve got my reservations about this whole bailout thing, and like my fellow All-Star CAPS players, I’m a little surprised that The Motley Fool is backing it. Perhaps it’s really come down to a case of curing the cancer without killing the patient: either path we choose, there’s bound to be a lot of sickness and death-risking acts involved.

So, where are we now in the throes of this downward slide?

The short answer: We’re fifty-two weeks into it, with at least another 52 weeks to go before hitting bottom, and probably more like 65 more weeks or longer, depending upon how much the Fed & Congress mess with the markets, trying to “control” them.

How do I know this? One answer could be “I’m Arnold’s much-wimpier cousin, sent back from the future, having seen it play out, and it’s not very pretty”, but I don’t think you’d buy that one. No, instead, my guess is derived by looking at data from the “Medusa Curves”, a moniker I’ve taken to calling MauiPeter's and my collection of graphs featuring:
&nbsp&nbsp&nbsp&nbsp the S&P500 History of Corrections,
&nbsp&nbsp&nbsp&nbsp the NAHB’s Housing Market Index vs. the S&P500 Index, and
&nbsp&nbsp&nbsp&nbsp the Coppock Curve.

If you’ve been reading my past columns on this subject (July 2008 and August 2008), you’ll remember there’s an 85% correlation underlying the second-mentioned graph. This correlation between the HMI and the S&P500 Index was discovered by David Rosenberg, the Merrill Lynch economist, who saw before the rest of us what the effects of cheap money and Congressional deregulation would do to the housing industry and the stock market. Ok, maybe that’s giving him too much credit, but he did spot the trend first.

Here are the graph updates through Monday, September 29th, which, considering how the market fell today back down to those same levels, is equivalent to performance through today (Thursday, October 2nd, 2008).

SP500 Corrections thru Sept. 29, 2008
Click here for the full image.

As you can see from this first graph, we’ve fallen 29% from that high of 1561.80 back on October 8th, 2007. If this recession is to follow in the footsteps of the 2000-2002 decline (and I have every reason to believe it will be the same or worse), then we are slightly more than halfway to the bottom. I have to shake my head when I hear people on CNBC calling today a market bottom (just like yesterday and every other week for the past 6 months). That’s not to say you can’t cherry-pick the market for hidden gems, or hedge with foreign stocks/funds, or make money on shorts (well, as long as they’re not financial shorts and as long as the SEC doesn’t change its mind again!). But it’s going to be a lot harder to do so. The tide is still moving out…

This next chart is the Rosenberg correlation of the Housing Market Index against the S&P500, and it supports my assertion in the above text that the S&P500 will continue to slide:

NAHB HMI and SP500 Sept. 29, 2008
Click here for the full image.

In the HMI chart immediately above, we are finally starting to see real downward movement of the S&P500 (yeah, tell me sumpin’ I don’t know, Gar!), but we are also starting to see a leveling off of the HMI, which is a very good thing. If the HMI levels off here or starts to move up and if Rosenburg’s correlation continues to hold, then we might be lucky enough to have the stock market hit bottom in another 12-15 months, say in Sept-Oct. 2009. Lots of “ifs” here, but they only serve to shorten the S&P500’s death drop. More than likely, the S&P500 will not hit bottom for 15 or more months, IMO.

Finally, here is the Coppock Curve still showing a bearish sentiment:

Coppock Curve for SP500 2008-09-29
Click here for the full image.

The big unknown here is this: Has the market decoupled itself from the NAHB’s index, finally sundering that 85% correlation? The answer may be “Yes”, but that answer doesn’t matter right now, because a “Yes” answer doesn’t mean the stock market will roar back to its break-neck pace. Far from it. Perhaps the “Quintessential Orgy of Cheap Money and Congressional Deregulation” is over for the finance & banking industry & their lobbyists, but their corporate greed, highly-leveraged dealings, bewildering books, and crap assets have brought this country to the edge of financial ruin. It will be difficult at best to back away from the precipice. Make no mistake about that: we are staring directly into Medusa’s many eyes and we should be petrified.

I don’t see the present economic situation getting better anytime soon. I’m expecting unemployment to rise, as well as the Consumer Price Index. With car sales plummeting, large UAW layoffs at the Big 3 automakers are just around the corner. I think I will follow TMFSinchiruna's lead and invest in gold funds (like CEF), but leave a large part of my losses in place (I've already hit my maximum tax loss limit reasons for this year). Hopefully, in 3-5 years they'll be worth something again.

Not that it’s all Doom-n-Gloom around here. Heck no! We’ve got an anniversary to celebrate: Happy First Anniversary on our stock market slide into Medusa’s tangled coif. In a few days (October 8th or 11th, depending upon how you reckon it), it’ll be time to rush about and celebrate that cherished event with friends and loved ones. And since winter is coming and the traditional first year anniversary gift is one of paper, might I suggest you give each other firewood kindling in the form of wadded up US dollars? Believe me, after the Hanke-Panke Plan goes through, that paper will be worth more as fire-starters than for anything on Taco Bell’s 99-cent menu.

5 Comments – Post Your Own

#1) On October 03, 2008 at 12:54 AM, Tastylunch (28.69) wrote:

suonnova CAPS ate my awesome reply, oh well

Thanks so much for posting this Gar, I love this series of yours.

Btw has the artist known as Mauipeter ever run this with the Nasdaq? just curious if the correlation holds...

Incidentally, I saw a graph from Investor's Business Daily back in 2004 that normalized and superimposed the DJIA from 1929-1933 over the Nasdaq from 2000-2004, pretty erie how closely they matched up....


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#2) On October 03, 2008 at 2:21 AM, TheGarcipian (34.96) wrote:

Ha! The artist formerly & presently known as MauiPeter has not got his butt online (ahem, Peter), despite my pleas. He deserves the credit for pulling all the data together. Me? I just spend a few hours writing about it!  (My apologies to dwot when, long ago, she said that blogging took up so much of her time, I scoffed!)

MauiPeter has not graphed the NASDAQ against the HMI, but I will put the suggestion to him, and we'll see what he comes up with. I think he chose the S&P500 because it's more representative of the entire market, rather than being only tech-laden. I've seen the one graph you're talking about, and yes, it was quite eerily superimposed.

Speaking of MauiPeter, he did email me earlier today with this bit of joy regarding our current economic state: "The thing to remember is the amplified ripple effect. PCE (personal consumer expenditures) account for 70% of US GDP (government spending and capital equipment account for the remaining 30%). So when consumers retrench even the slightest bit, the manufacturing and distribution channel that supports consumer buying contracts in an amplified way. A 20% reduction in auto/light-truck retail buying (from 16million down to 13million) could easily cause dealers to reduce their factory orders by 30% which could in turn cause a 40% contraction in auto manufacturing, throwing tens of thousands of UAW members and parts suppliers out of work, and companies into bankruptcy. Are we having fun yet?"

Regarding CAPS, I think it's going through some sort of mid-life crisis, especially late at night (when you & I seem to post). Starting two nights ago, it's been slow, petulant, dropping requests, timing out, and losing my best most brilliantly crafted retorts and blastingly bellicose blogs ever written. (Sunnovagun!) So, you only get these... ;-)

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#3) On October 03, 2008 at 10:48 PM, Tastylunch (28.69) wrote:

Man this is bull this wasn't a top five recc'ed post today Gar. AT least three of the top five blogs today were mediocre compared to this.. Original work like this is what is best on CAPS. I may blog if I find the time (like you said it take a while I usuakky wirte bits and pieces of m blogs in between customers) just to try to fix this injustice.

Yeah the S&P 500 is the by far the best proxy, just a curiousity for me about the Nasdaq. Some claim it's the "true" market these days. Other say the FTSE. But since NYSE acquired archipelago, I think the S&P has reclaimed the title imo...

Jeez if that's what Mauipeter thinks is ahead no wonder he had some heart issues . :-( Unfortunately I'm inclined to agree.

Yeah CAPS is definitely still beta, I cna't imagine how much work it would be to fix all the glitches. All things conisidered it runs pretty smoothly.

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#4) On October 06, 2008 at 5:14 PM, TheGarcipian (34.96) wrote:

Thanks, Tasty, for your encouragement. Ai-yi-yi, today's intra-day DJIA drop of 7% below 9600 was brutal. Glad to see the index recover a little, but I don't expect the rally to last long. We'll still be sliding for another 12 months.

By the way, it should be pointed out that the graph of the five S&P500 Corrections is not a predictive graph (like the Coppock Curve and the HMI vs S&P500). I use the HMI vs. S&P500 to get a prediction that we'll hit a low and work through all the current turmoil in about 12-15 months. The real value in the History of S&P500 Corrections graph is understanding where we are now, how bad it is right now compared to the two most recent bad bear markets in 1973-74 and 2000-02. 

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#5) On October 06, 2008 at 5:19 PM, TheGarcipian (34.96) wrote:

From this MarketWatch story today, "the Dow Jones Industrial Average dropped 700 points and pulled the index below the 10,000 points level for the first time since October 2004. The S&P500 was hit hard as well, and touched a 5-year low."

Wow, new 3- and 5-year lows being tested. And still more to come... I wished I'd sold more earlier.


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