Mad Money Machine

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Two Years of Decline Packed Into Five Months

This is a follow-up to my posting from last May called “Technical Analysis and Trend Following” where I compared the S&P 500’s decline from 2001-2003 to the movement from April 2006 to May 2008. ┬áIt was a thinly-veiled jab at those who were predicting a resumption of the bull market based upon a recent uptick in the market. I showed that there was an uptick in April 2001:

and anyone who bought at that time lost big as the index went from about 1300 in April 2001 down to 850 in 2003:

Then I showed a chart that looked similar to the first chart, but this time one that was of the recent market from April 2006 to May 2008:

April 2006 to May 2008

This was a time when stock market pundits like Cramer and most of the talking heads on CNBC were saying the market was set to go much higher. Others who didn’t get mass media attention like Nouriel Roubini, Peter Schiff, Gary North, and Ron Paul were saying we were in big trouble.

Amazing how it worked out. Chart #2 above took two years to drop from 1300 to 850. This next chart took only five months, from May 2008 to October 2008, to drop the same amount. And yes, there was an intra-day low of 839.8 on October 10th.

S&P 500 May - Oct 2008

If I were to show a chart from February 2003 to October 2007, it will look like the north slope of Mt. Everest. Oh heck, why don’t I go ahead and show it…

Everest

Is that what the S&P 500 will look like from October 2007 to 2011? Or will it be condensed into a space of five months like the recent deline was? Or will it be different this time?

I do not know where the market will bottom out. My sense of it is that the market will trade violently around the current level for the next few months, bouncing along this bottom. As earnings report come in lower, the P/E ratio of the market will adjust accordingly. I think there is more widespread bearishness today compared to May. But I think there are still a lot of bulls trying to buy the bottom. There is an epic battle between the bulls and bears which will continue until we see the light at the end of the economic crisis tunnel.

Meanwhile, I’m taking a look at dividend focused funds and will report on show 133.

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Wed, October 15 2008 » Analysis, Blog, Predictions