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TheGarcipian (60.53)

Sweet Medusa, Do Not Look At This Picture!

Recs

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July 04, 2008 – Comments (10) | RELATED TICKERS: SPY

Well, the Pooh is finally here. Whether you’re an A.A. Milne fan or not, you should realize where we are now. No, it’s not the Hundred Acre Wood; wish it were so. But we are now officially in bear territory. Back on October 11, 2007, during trading hours, the S&P500 peaked at 1,576.09, but it hit a new low yesterday, July 3, 2008 of 1,252.01. That’s just over a 20% drop, which is the official definition of a bear market. That shouldn’t come as any surprise if you’ve been paying attention and ignored the wagging tongues of politicians and political appointees. Bernanke, Paulson & Bush, I’m looking at you chums…

I wish that were the end of the bad news. Everyone prefers pictures over words because so much more can be conveyed. Well, here’s an ugly one for your perusal. Warning: This is an E-Ticket Ride. You should be old enough to have experienced at least two past market declines and should you choose to proceed further, you acknowledge that you may become blind, petrified in stone, nauseated, upset, or, at least, mildly anxious.

You will probably have to click on the link to see the entire picture, as this blog space is not wide enough to display the full graph: 

S&P500 Corrections

My friend MauiPeter has constructed this little jewel for us. It shows the last 5 worse market corrections we’ve had, as calibrated to the S&P500 curve, and they have been normalized so that we can do an apples-to-apples comparison between them. The start dates for which each downturn commenced were pulled from a John Hussman report in an article entitled “A Who’s Who of Awful Times to Invest”.  For the most current correction, the date of Oct. 1, 2007, was used at an exhibiting price of $1557.59 at its peak. This peak value is what was used to normalize the other market corrections in terms of the current one, essentially starting all curves off from the same point on the Y (vertical) axis of $1557.59. The value along the X (horizontal) axis is the number of weeks from those start dates that the market correction lasted.

As you can see, the Oct2007-Oct2009 Correction (the black line) is following the Jan1973-Sept1974 curve fairly well. MauiPeter & I have shared & discussed this data since February 2008, and I really didn’t want to believe it. But the longer we go, the closer today’s market is mirroring the 73-74 curve. Unfortunately, that curve is one in which we experienced a huge 48% decline in the S&P500 over that long 21 month slide.

Do I think the current recession is going to last as long (92 weeks)? No, I think it will last longer than the 73-74 slide, which means (to me, anyway) that we’re not even to the halfway point in this slide. Do I think the current recession will dip as low? Ah, that’s the harder question. It very well could. Things are different yet the same now, three-and-a-half decades later. Let’s check the list:

&nbsp&nbsp&nbsp We’re embroiled in a costly war. Check.

&nbsp&nbsp&nbsp Inflation is getting away from the Feds. Check.

&nbsp&nbsp&nbsp Consumer confidence is sliding. Check.

&nbsp&nbsp&nbsp Unemployment is climbing. Check.

&nbsp&nbsp&nbsp&nbsp Stagflation is growing. Marginal check, as it’s too early to tell for the current recession.

&nbsp&nbsp&nbsp Oil is skyrocketing in price. Check (although this time, it’s not about OPEC shutting down shipments to anyone supporting Israel, but rather market manipulators making hay out of the Enron Loophole).

What’s that? Sure, go ahead, reach for the Pepto Bismol. I’ll wait…

Back now? Ok, there’s a little bit of good news here, but not much. Look at this next chart (again, click here to see the full view): 

Coppock Curve 1950-2008

This is the Coppock Curve for the S&P500 over the past 58 years. Introduced by Edwin Sedgwick Coppock in Barron’s in 1962, the Coppock Curve is a long-term price momentum indicator used primarily to recognize major bottoms in the stock market. See the embedded link for how it’s calculated, if you’re interested, but it’s essentially a long-term-weighted average of S&P500 prices.  Here, it’s important to understand that Coppock followers believe a buy signal is formed when there is an upturn in the curve after an extreme low in the curve, and that a sell signal is formed when there is a higher peak in stock prices but a lower peak in the Coppock curve.

The thing I wanted to point out is we’ve been experiencing exactly this behavior since October 2007 (Halloween, arguably). The Coppock curve has now crossed into negative territory which, optimistically speaking, means we’re that much closer to a bottom. But as we all know, bottoms can take a long time to find (exempting some Congressmen and their Pages, of course), so we may wallow on the Coppock Curve for sometime in the -30% to -40% range before things start to get better. During this wallowing, the S&P500 could intermittently drop even lower, though the weighted average of the Coppock Curve would smooth out those drops. For instance, you’ll note the 1972-1975 “CC” slide only dropped to -30%, though the actual S&P500’s bottom eeked back up after striking a 48% total loss. (Side Lesson: Weighted averages are good for the soul. They help take your focus away from the minutiae of intra-month trading prices).

Sorry, but that’s all the good news I’ve got here. I hope you do have a happy, safe and festive Fourth of July. You can go back to your bar-be-que and your Pepto Bismol bottle now, if need be. Try not to mind the Pooh until next week…

10 Comments – Post Your Own

#1) On July 04, 2008 at 8:06 PM, TheGarcipian (60.53) wrote:

As a followup, next week is when we should start seeing reports (or leaking of report information) about Q2 and how badly the financial houses are in order. I think we'll definitely see the 1100's next week for the S&P500.  I'm tossing out 1195, a good 5% drop from today's mark of 1262.90. Anyone else care to venture a guess as to the closing price for the S&P500 by next Friday?

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#2) On July 04, 2008 at 9:34 PM, Tastylunch (29.27) wrote:

This gets my vote for post of the month. Awesome stuff Gar. It's kinda nice to see raw graphical data on this, It vindicates my gut feeling on the market. It will be interesting to see what  number this market hits on the Coppock curve, my guess like you that the bottom will be somewhere sub -20 (or perhaps even sub-30) due to the peculiar economic nature of this downturn.

oh and for the graphs I do beleive there is html code that can allow you to scale down the img size so it will fit in the pane, but it would have probably made it tougher to read anyway. Don't remember exactly what it is, but I think it's something like e.g. heightt=80% width=80%

Thanks so much for the post. I hope you get on the CAPS Home page for this,.

 

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#3) On July 04, 2008 at 11:32 PM, Phoenix07 (23.48) wrote:

Best post I've read since being a CAPS member. This is great stuff (and absolutely painful to read). You can feel the accelaration of this decline since the slight rebound off March lows. We are in the middle of a deeper faster leg down. I have no idea where it ends and unfortunately, I don't see any catalysts for good.

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#4) On July 05, 2008 at 12:19 AM, abitare (39.81) wrote:

An outstanding post.

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#5) On July 05, 2008 at 2:19 AM, FleaBagger (29.74) wrote:

Good post, but you have the oil thing all wrong. Those evil speculators are only pricing in Indochinese demand, peak oil production worries, and legitimate fears of more geopolitical trouble in or amongst oil-exporting countries. If they profit, they're monsters, but if they lose their shirts they brought it on themselves by being greedy, right?

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#6) On July 06, 2008 at 12:25 AM, TheGarcipian (60.53) wrote:

All -- Thanks for the Tats (ink). Dems kind words. But all the credit for the tracking & comparisons really goes to my long-time friend MauiPeter. He did a great job putting these two curves out there for me to comment on. And while it'd be cool to be Post of the Month, that's not why I posted it. Actually, I'm hoping (against hope) that this post is some sort of ethereal cathartic balm, that if I voice my fears, perhaps it'll not be as bad as it looks. Do you realize that if we have another 20%-30% to drop from today's value, that will put the DJI's nadir between 8000 & 9000, and the S&P500's bottom between 900 & 1000?  Yowza, that's going to be pretty ugly. (And I'm really trying hard not to be an alarmist here). Just remember to breathe... However, before we can judge this new projected bottom, I've got to get that first chart updated. I'll post an update as soon as I can get Peter back online or he gives me his spreadsheets.

Tasty -- Thanks for the HTML reminder. Yes, I think that's the way to do it, with "height" and "width" parameters. In my rush to get this blog put together and prepare for fireworks viewing, I'd forgotten just how to do it. Thanks again.

Flea -- Yessirree, that double-edged sword makes for fast profits, but it cuts both ways. What does a pound of flesh look like off these "evil speculators" anyway? Play-Doh gone rancid? Lastly, when the bomb goes off, does "duck-n-cover" still work? Maybe it's more like "short-n-cover" now...

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#7) On July 06, 2008 at 3:09 PM, SemperGumby77 (56.26) wrote:

Garcipian,

This is an excellent, excellent post and really puts things into perspective from a technical point of view. It was for this reason that I immediately added you to my list of favorites - great work!

You may be right in your assessment that the S&P falls another 30% from here. I think the fundamental value lies about 15% down, however once these sort of trends begin, they tend to spiral into a self-feeding frenzy, trending longer and falling further than would otherwise be reasonable.

I'm a market neutral investor, usually keeping an equal number of shorts and longs (its the only way I can sleep at night), but if I were one of the many long-only types out there, I probably wouldn't start adding until we got closer to 1050. Even that may be optimistic on my part.

Hope your weekend was a good one,

Semper 

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#8) On July 10, 2008 at 6:20 PM, VTEngineer2001 (< 20) wrote:

I think it is interesting that as time goes on in the graph, the more frequent these types of corrections occur. I wonder if this is due to information able to be obtained quicker, or if this is just coincidence.

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#9) On July 11, 2008 at 1:36 PM, darroj (33.27) wrote:

Gar, fantastic post. Thanks for taking the time to post this.  Save up your money now, bargain hunting to follow.

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#10) On July 12, 2008 at 1:10 AM, TheGarcipian (60.53) wrote:

No doubt, darroj!  I just glommed a nice little wad of cash after I closed out a real-world short on LEH today after its mammoth drop this morning. That cash will go into a fattening piggy bank and be used for some bargain purchases. Of course, the question remaining is: when to jump back in? My crystal ball's a bit fuzzy at the moment. How's yours?

VTEngineer2001, I tried again but I can't see what you're talking about in the graphs; I'm not following you. There may be a bias in the data of which I'm unaware. If so, please point it out in more detail. Thanks. I'm always looking to question my own observations. After all, that's how we learn more and learn better. 

We did not list all of the S&P500 corrections during those years, just the Top 5 Worst ones. The time between the start of each decline was: 11, 14.5, 13, and 7 years, respectively. I don't see that as a trend in increased frequency. If you're talking about the Coppock Curve, it appears to me that the latter stages are thicker and thus less frequent, not more. Or have I missed your point altogether?

All: Well, the Pooh really did hit the floor this week, didn't it? Especially today with IMB biting the bullet, LEH & MER & others taking a long walk out on a ever-shortening plank... Now, wasn't that fortunate for us all to not have to worry with this impending doom last weekend? That we could all enjoy our Fourth of July festivities without worrying about the Next Great Depression? Yes, it was, even if it were only for a little while.

BTW, MauiPeter & I are holding out updating these graphs until the 15th of the month at which time the Zoloft-taking NAHB (National Association of Home Builders) updates their Housing Market Index (HMI). As the subject of another blog I've been meaning to pen, there is a correlation between this housing tracker index and the S&P500. It relies upon the HMI. When you view all 3 of these graphs together... well, you'd better have a defibrillator handy...

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