Sweet Medusa, Do Not Look At This Picture!
July 04, 2008
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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:
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:
   
We’re embroiled in a costly war. Check. 
    Inflation is getting away from the Feds. Check.
    Consumer confidence is sliding. Check.
    Unemployment is climbing. Check.
    
Stagflation is growing. Marginal check, as it’s too early to tell for the current recession.
    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):
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…
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