Stocks – 1975 All Over Again?

Is it 2004 or 1975?

It’s often been said that history does not repeat, but it rhymes. So what was this nursery rhyme last time we heard it?…

A lot of folks have compared this particular market to 2004 (including me) when we came out of the last downturn. There is much to recommend that idea. We’d had a plunge, and a rapid recovery. Then a ‘flat rolling sideways’ segment.

This chart is the NYSE or New York Stock Exchange all listings for the most recent decade. Notice that 2004 segment about 1 1/2 years from the first dip.

NYSE Recent Decade View

NYSE Recent Decade View

But there is something wrong. The “pace” of recent change is more violent. As much as 2000-2004 was a challenge, it was not at all as volatile nor as gut wrenching as the last year or two. Was there another time that ‘looks’ more like this? I tried 1987. While it is a violent market break, it does not have the same pattern. More of an airpocket in the middle of a long expansion. But I did find a match.

NYSE 1971-1975

NYSE 1971-1975

Compare with a similar present 5 year view:

NYSE 2005 - 2010

NYSE 2005 - 2010

It actually looks a bit closer to the 10 year chart pattern in this log scale chart ( which implies we are running a bit slower in pace now, believe it or not…) So compare the ‘plunge’ in this chart with the one way up top.

NYSE 1970 - 1979

NYSE 1970 - 1979

That too was a time of rapid change. We had the leaving of the gold standard, the Arab Oil Embargo, and a general disruption of the world markets.

So what does this imply for us now? Take a look at what happened after that recovery last time. 2 years of drifting downward. So looking at RSI, MACD, DMI it looks to me like we’re about the start of 1977 as the closer fit. Perhaps we have simply skipped whatever caused that late 1975 hiccup to the downside (or perhaps, we’re in the middle of having one).

But it’s not a repeat, it’s a rhyme…

So this chart just advises me that I ought not to expect a return to rising, and ought to be prepared for rapid drops, rapid rises of short duration, and a generally dropping trend for the next couple of years.

If past is prologue…

Advertisements

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged , . Bookmark the permalink.

15 Responses to Stocks – 1975 All Over Again?

  1. P.G. Sharrow says:

    Welcome to the club.

    Jimmy Carter on steroids is what I have seen coming. Oil price manipulations to start, “investment bubbles” that burst, runaway government spending followed by stagflation. and the “Darth Vader” of economics and helper of Soros in destroying national economies as chief adviser, Paul Volcher.

    Good news, “The Great Deceiver” will try to rule by decree during his last 2 years as he will lose control of congress, he will be replaced by a wise old man that will heal the world and set things right for the start of the new era. :-) survival mode for the next few years. pg

  2. E.M.Smith says:

    Yeah, Paul Vulcher has always been bad news… And I really really would like to see the trade book of Soros. He made his billions by betting on socialism to cripple national currencies and central banks. Now he’s encouraging socialist changes and has “friends” encouraging central banks leveraging up to the moon. Hmmm…..

    If I’d made a few billions driving the Bank of England into ruin betting against English Socialism, I’m sure I’d never never want to encourage other countries to make the same mistakes while betting against their currencies. That Would be Wrong… and manipulative…

    I’m sure his only motive is a true love of humanity

    /sarcoff>

    At any rate, I think you are right, except I’m not so sure about the “wise old man” part… we might just be simply hosed.

    At any rate, I’m not seeing a whole lot of reason to go “long this market”… And watching the charts, it’s just laying there like a passed out drunk.

  3. Ruhroh says:

    Yeah, right after you posted this, the market rolled over and puked…
    RR

  4. Tim Clark says:

    E.M.
    I was looking at the usgs earthquake site and that 6.5 in western Brazil this morning was located:

    Depth 565.3 km (351.3 miles) set by location program

    How can that be? Isn’t that below the mantal?

  5. Wes says:

    Chief,

    I think there is a great under appreciation of the level of fear present in the market right now. On Friday, the VXO rose above 45, a level associated with MAJOR bottoms in the market (except in confirmed bear markets).

    Now, this doesn’t mean necessarily that the low is in, but a reading this high almost always occurs within days of an important low. (I don’t follow the VIX because of limited historical data).

    Similarly, nearly all of the psychological indicators I follow indicate exceptionally high levels of fear.

    Admittedly, this method of market evaluation is not perfect, but my records indicate that the market is giving potential buyers great odds of success right now.

    My advice is hold your nose (or whatever else you may prefer) and buy.

  6. E.M.Smith says:

    @Tim Clark: the present number is “only” 85 miles….

    I think we’ve just got the ‘early numbers things are still being analyzed’ effect. BTW, looks like I was putting up a posting on this while you were commenting… See the Brazil Quake page for maps and such.

  7. E.M.Smith says:

    @Ruhroh: Yeah, he ain’t feeling so good…

    @Wes: You can only abuse folks so much before they simply choose not to play. The removal of the Uptick Rule and the complete and utter lack of enforcement of the “no naked shorts” rule has left the market wide open for old fashioned “Bear Raids” they like of which we have not seen since 1932. OK, take a look at the last couple of crashes. Instead of a 2 year long ‘stair steps down’ we get ‘start to falter and completely and utterly collapse’.

    Frankly, it’s moved me from a more or less “long bias investor who trades a tiny” into a “balanced book hedge fund manager with occasional directional bias as warranted”. If I were not able to do that, I’d just leave the market.

    So what’s happened? The “Just Plain Folks” got burned bad in the 2007 crash. They sort of started to get comfortable a little bit and we had the “Flash Crash”. Now they are buying gold and stuffing it in their mattress.

    Come back and jump in this pool? Not for Ma and Pa Kettle.

    IMHO, this will get steadily worse until the Uptick Rule is reconstituted in some way or another ( call it the 25 cents rule since we’ve gone to penny ticks) and the derivatives “pass” on the naked short rule is capped (can’t get a borrow, heck, just buy puts, the broker can naked short…).

    Until that’s ‘patched’ the sharks can simply sell short 100% of all stocks owned by the retail investors and jump to the head of the panic process, then wait for retail panic to hit and cover at the bottom. A very asymmetrical process that gives the market operator all the cards.

    Ma and Pa will play that game once. The slower ones twice. Then they will simply go somewhere else. And without the retail investor, there is nobody to hold stocks through any downturn. Every minor cough becomes a Flash Crash to market death. Heck, I’m “out to cash” in about a 1 to 3 day lag at most and developing the skills to make that 1/2 to 1 days and the end being “short” not cash. That is NOT because I want to do it, but because I think that’s the only way to stay safe with these market rules. AND I’m teaching others…

    So play this forward –

    You end up with everyone playing a roulette wheel and only laying chips on the table once the ball is released. Then picking them all up after each spin. That’s not investing, that’s a casino. And that will kill the stock market as an investment vehicle.

    Heck, I’m already telling friends to avoid the individual issues risks and predominantly hold large index baskets. How do you do an IPO once everyone is only holding the SPY and you can’t float until you’re part of the S&P 500 ?

    And how do you get the S&P 500 to not crash when folks know to move 100% out of stocks and into bonds at the first Fed Rate Cut (and back out of bonds at the first rate rise after all the rate cuts) at the end of a market advance? And can do it in one mouse click? ( Or perhaps even via a simple computer program trade alert?)

    So we’ve taken out the fire extinguishers and fire alarms, we’ve given the shorts a priority “cut to the head of the line” at the exits; AND we’ve handed them a can of gasoline and matches. Then we’ve told everyone else how to run for the door even faster and handed out match books to some of them. Yeah, that’s gonna be a problem…

    I know the theory that shorts make for a more efficient market and help prevent bubbles. That only works if there is a limit on their avarice and non-zero fear in them; and they are not given excessive power to induce panic and excessive access to the exits. Basically, the ‘longs’ need to be able to ‘corner the shorts’ via buying stock and taking it out of the pool. A short squeeze. No limit on ‘naked shorting’ and I can short an infinite supply. That makes the price zero, and I don’t care how much you buy. Winner is whoever has the biggest bank account. So “The Biggest Trade Desk Wins”.

    Ma and Pa Kettle need not apply…

    So when the uptick rule left, I moved to modest levels of trading and more paranoid rules. With the lack of enforcement on naked shorting, I’ve gone to full on hedge fund rules but with a modest long bias. With continued lack of repair of those things (and with the increasing volatility as other folks catch on) I’m moving into ‘day trades only’ as I build the skill set and advising friends to do the same or stay clear.

    That’s unstable in the long run. I give it about 2 to 5 years.

    Then again, we’ll see. The administration is busy breaking the rest of the financial sector, so we may not have that long. Or they might accidentally fix this in the process.

    Why they don’t just look at 70 years of history of Glass Steagall and the uptick rule working and “Put them back” is beyond me…

  8. P.G. Sharrow says:

    There is no doubt that naked shorts is a fraud on investors. The uptick rule only helped to slow down the rate of theft.
    A naked sale is the creation of some thing that does not exist to flood the market and steal the value from the real owners.
    Any brokerage that abets is an accessory to the crime and needs prosecution like Berni Madoff, but as long as the criminals are in control you need special care to not be their target.
    To fix things, figure out a better way to do it. YOU may have a chance to better things.

    Don’t we live in interesting times?

  9. E.M.Smith says:

    @P.G.Sharrow: The ‘slow down’ from the uptick rule allows the average investor to exit at a more equal pace with the short. It reduces the percentage of gain to the shorts and discourages the excesses. Basically, they shorts must wait for a ‘natural buyer’ to move the stock up a tiny before they can short. Until that time, all the ‘regular folks’ can sell at a more rational price. It puts the short at the back of the line until a natural buyer shows up. And I’m fine with that. As it is without the rule, the short can simply short a stock to near zero in 30 minutes and the average person gets no chance to ever sell. We saw that in the Flash Crash with prices in the pennies in just a few minutes.

    So I agree fully on the naked short, but think the uptick rule is a useful adjunct (even if not a full cure).

  10. Wes says:

    I’m still of the opinion that we’re putting in a MAJOR low here.

    Of course I haven’t found certainty with my indicators, but they tilt the odds heavily in favor of the bullish outcome.

  11. P.G. Sharrow says:

    Wes; I agree that we are seeing a second bounce selloff, but who wants to try to catch a falling sword? A market pundit said today that the market was over sold, because P/Es were down to 15. 15! Hell, after the last big selloff in the 1970s the P/Es were down to 8 or lower on good payers.
    I see no big rush as we have all summer to get to blood in the streets.
    Money is moving to gold and silver, in my opinion, and they are over priced based on “cost of production”, specially gold. A lot of inflation is all ready built in.
    The latest news that I have heard is income producing real estate in the Bay Area is under priced, as is good farmland. But you need to haggel as ask price to accepted price spread is large. Rental income now covers all costs, last time I saw that was nearly 40 years ago.
    When you are at the bottom every indication is bullish, but it is very dark down there with little or no light to be seen. I don’t think we are there yet.

  12. Bruce of Newcastle says:

    Interesting chart shape Chiefio.

    Believe it or not Alan Kohler who does the financial segment on our (Oz) ABC evening news put up that same chart shape (ie 1971-5/2005-10) a few nights ago.

    The moral of the tale was don’t hold your breath…average wait for our index to break out of the band was 5.6 years!

    Our ASX index correlates quite closely to the S&P 500.

    So only 4 or 5 more years of mad bouncing to look forwards to. Joy :)

  13. Wes says:

    @P.G. Sharrow

    I’m not a big fan of P/E ratios, but that’s not the same as not being aware of them. And, they historically have been much higher than people have been led to think

    Since 1970, for the last 40 years, the average trailing 4 quarter P/E ratio has been 20.85.

    When interest rates ( Tres bill+2yr+10yr)/3 have been less than 5%, the 4 quarter P/E has averaged 23.86.

    Now, and explaining your 1970 example, when interest rates have averaged more than 10%, the average 4 quarter trailing P/E has averaged 9.35.

    If you planning to wait until interest rates are high to invest in stocks, you should look for low P/E’s. Otherwise, don’t hold your breath.

  14. E.M.Smith says:

    @Wes: Ah, but WHEN?… That’s the problem with contrarian sentiment indicators, they are sometimes a bit early. RSI is a sentiment indicator of sorts, and I use it to “set the trigger” as it indicates just a bit early. Then I wait for “market action” to confirm. that is with ‘near contemporary’ indicators like Slow Stochastic for fast trades (or in flat markets) and slightly lagging indicators like MACD to show the action has begun.

    I’ve spent just too long too many times ‘buying value’ and ‘buying bearish sentiment’ and then being down another 10% while I waited… Yeah, it EVENTUALLY works, if you have the patience for it. So instead I wait to be a ‘late in’ on a MACD or similar or I’ll just use a trailing “buy if touched” order above the price. That way I’m not committed on ‘when’ and let the market decide for me.

    Substantially all my ‘market timing’ work came directly out of being a bottom fisher and ‘buy value’ or ‘buy the dips’ practitioner and finding out that depressed folks can get even more depressed….

    BTW, on PE Ratio: I played that game for a while. Found the same thing. A “great stock” at a PE of 16 was even greater at a PE of 8, and truly spectacular at a PE of 4. Then again, I’d lost 3/4 of the money I put in at PE of 16. (That was what lead to looking at ‘sentiment’ as sentiment could get ever worse… AND drove PE in the short run.)

    @Bruce of Newcastle:

    Golly! Wonder if he has a blog somewhere? Sounds like a guy I’d like to watch ;-)

  15. Bruce of Newcastle says:

    No blog, Kohler is too much in demand I think. Tapes his own 45 min show each week that I watch also & does lots of other stuff.

    Website: http://www.businessspectator.com.au/

    That’s him top left.
    (I’ve no material interest, I just like the graphs he puts up :) )

Comments are closed.