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TheGarcipian (57.74)

It's Hammer Time! (Curves, Crashes, Beer & LSU Football)

Recs

10

October 10, 2008 – Comments (5) | RELATED TICKERS: SPX , SPY

Part IV: Medusa Lets Loose

As I’d predicted in a reply to DemonDoug’s blog here (Comments #20 & #21) on Sept. 27th & Oct. 6th, 2008, a water-hammer effect is in the works with regards to the short-ban being lifted yesterday, aggravating an already agitated system worldwide…

I think it’ll take some time for the “water-hammer” effect to surge through the worldwide financial system, but hopefully not more than a week or two. It should certainly calm down after investors (especially the large-scale institutional investors) realize that panicking only leads to more losses. But there are also a lot of people out there who are not Fools, who have not been paying attention to what we’ve been saying here for the past nine months (approximately), so the pain could be amplified and carried longer than duly necessary.

But now that we’ve got fresh blood in the streets, where does the recent carnage stand with respect to the “Medusa Curves” that I and MauiPeter have been following? Glad you asked!  I asked Peter to update the our 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.

It’s only been one week since I last posted these curves, but wow -- what a week it has been! Here’s what they’re showing (performance is through Oct. 9th, 2008):

SP500 Corrections thru Oct. 9th, 2008
Click here for the full image.

 NAHB HMI vs. SP500 thru Oct. 9th, 2008

Click here for the full image.

Please remember, the Historical S&P Corrections graph is not predictive, but meant to give you a feeling for how far along we are in this slide as compared to other bad recessions. In particular, I’ve been prone to compare our current demise with the 1973-74 and 2002-03 slides, both of which dropped 48% ultimately before reversing course. We are currently at a 42% loss from the high exactly one year ago, but considering:

(1)   how the faith in the United States financial system has been shaken from investors around the world; and

(2)   how the deregulation so espoused by one particular party in power has so fouled up this system with mistrust and non-transparency on exactly how bad the problem is;

I don’t think we’re near the bottom yet. I think there’s more to come, but hopefully not much more. You'll note too that our current plunge is sloped as steeply and sharply as the October 1987 crash, itself a beautiful & lively canary compared to ours in this coal mine.

As I’d pointed out a week ago, the good news is that HMI line (which only changes on the 15th of each month) shows a leveling off, which is very good. To quote myself:
. 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.

The Coppock Curve is still showing a bearish sentiment, just like last week, still plummeting and not leveling off.
Coppock Curve for SP500 2008-09-29
Click here for the full image.

Note that this curve is predictive and can be used to gauge if we’re at a bottom. The truth IMO: we’re not there yet.

We’re still staring into Medusa’s many eyes while the hammer in our head keeps clanging.

Speaking of staring and hammering (and in particular hammer-heading), I’m going to be doing a lot of nursing my financial wounds this weekend with a local pub’s brews and one of my favorites: Hammerhead Ale. And I’ll be doing that as I watch my undefeated LSU Tigers (ranked #4 in the country!) trounce the Florida Gators (at #11 in the polls), starting at 8pm ET on CBS. Geaux Tigers!

LSU's Mike the Tiger

Cheers, Happy Weekend, and Best Wishes for a more stable market soon,
--Gar

 

Side Note #1: Gtrinvestor, I think you were a Gator graduate, weren’t you? I’ll drink one in honor of your team’s contributions to our run at another national championship!

Side Note #2: TastyLunch, you’d asked me about the correlation between the NASDAQ and the HMI. I had MauiPeter create an Excel spreadsheet and graph it for you (he loves doing this sort of stuff!). Here it is:

HMI vs. NASDAQ 2008-10-06
Click here for the full image.

Unfortunately, the correlation is not as good as with the S&P500. It breaks down fairly rapidly, and frankly, if you have to cherry-pick your data to get good correlation factors, well, perhaps the correlation is not that good. I’m not totally convinced the S&P500 will continue to be led by the HMI going forward, but so far, it’s been fairly good (much better than the NASDAQ).

As the table below shows, the correlation factor breaks down as I tried to move the curve out to include NASDAQ data through 10/06/2008. It only seemed to hold the correlation through September 2006 (not 2008), two years ago. This may be due to a number of things, one of which is probably the tech-heavy factor of the NASDAQ itself (that it’s not exactly representative of the entire market) and the fact that the housing bubble didn't affect tech stocks as much as S&P stocks.

Correlation Factors for NASDAQ vs. HMI, thru October 6, 2008
Click here for the full image.

5 Comments – Post Your Own

#1) On October 11, 2008 at 9:32 AM, JakilaTheHun (99.93) wrote:

Great charts! 

In the back of my mind, I've been viewing this as most analogous to the 73-74 recession, as well, which is why I'm not sure if it's over, either.  I also think it's possible that a bottom is close, but that we'll simply trade sidewards for another year after that.  

I'm definitely not in the OMG THE SKY IS FALLING crowd, but I do think this could be a somewhat painful recession --- it won't be a repeat of the Great Depression, but we could see a slow recovery.  All the same, prices compared to valuations are starting to look more and more attractive by the day.  

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#2) On October 12, 2008 at 3:06 PM, Tastylunch (29.22) wrote:

Thanks so much Gar and Mauipeter. I  had  guessed the correlation wouldn't hold as much (or be as strong) which makes sense when you look at the components of the S&P 500 vs the NAsdaq. Lot more financials in the S&P relative to the ole Nasdaq. Makes sense that the S&P would thus exhibit a closer relationship to the HMI

Still it's fun to find out :-)

Hmm I agree we aren't that the bottom. My first inclination would be to expect to bottom out around S&P 800 but the HMI correlation (and the Coppock Curve) is suggestive to me that it may be much lower.... What sticks out to me now, is how much not just the moves but the shape of the curves matchup.

I guess what you have to ask yourself is whether gov't intervention risks breaking the correlation...

Sorry about your Tigers Gar, I was pulling for them . As an ardent Ohio State Buckeye fan I don't want Tebow to win the Heisman twice. Thats our claim to fame (hey we've had a rough couple years, don't take that from us too SEC!) :-)

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#3) On October 12, 2008 at 5:35 PM, TheGarcipian (57.74) wrote:

Hi Huney and Tasty, I think you're both right. I think we'll see a very slow recovery (3-5 years, hopefully not more), and I think (I hope!) we'll bottom out around 800 on the S&P500. The S&P500 curve has most recently taken some huge hits, so momentum may carry the curve lower (like 650), but we are definitely in bargarin territory now. I think when the S&P500 hits 800 and holds that roughly for 2-3 months, I'll be purchasing again.

And Tasty, I share your concern about government intervention breaking the correlation or extending the cycle. These are unprecedented times.

Wow, did my Tigers get blown out or what? They suffered a 51-21 loss in Gainsville, FL. Sunnofabiscuiteater! Tim Tebow is an awesome player, truly awe-inspiring to know all that he's done, even winning the Heisman as a sophomore. He is truly impressive to watch and will be a great addition to the NFL. But I think it was our front lines, both defensive and offensive, that just couldn't cope with Florida's. They opened up so many holes on us, while we were literally running into our own people. At one point, it looked like a Keystone Cop routine with LSU running back Charles Scott running into our center who simply stood up in the hole in the middle of play. Stupid mistakes like that, repeated over and over, really made the game miserable to watch. The two freshmen Florida backs of Demps and Rainey were explosive in the secondary: really impressive to watch them run. There were sparks ignited on the LSU side, but in the end, Florida dominated us so totally. Mistakes by freshman quarterback Jarrett Lee were expected, and he had enough of them, but overall, we did not deserve the ranking of #4 in the country. Hopefully, we can stay in the Top Ten, but after that trouncing, we don't even deserve that. Next week, South Carolina in their stadium -- it's gonna be a rough week for LSU!

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#4) On October 15, 2008 at 9:20 PM, Tastylunch (29.22) wrote:

ah cool looks like my linkage may have got you some more recs for this. :-)

Seriously why your stuff isn;t in top 5 of the day is beyond me. Some of the drivel that gets voted up there is sad.

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#5) On October 16, 2008 at 6:06 AM, TheGarcipian (57.74) wrote:

Thanks, Tasty, for the help. I guess I've got to come up with more catchy titles (too many people judging the book by its cover?). Maybe I should toss in some "Sex", "Drugs", "Financial Armageddon" or "John McCain Eats Boogers on YouTube" crud in those titles to catch people's attention? And here I thought "Niacin Clamp" would've really piqued people's interest -- silly me!

Wait til you see my next post. It's gonna be simple and straight to the point of how I feel right now. And I dare them to Rec it up to the 30's!

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