Friday, November 21, 2008

Cautious And Temporary Optimism

Looks like 7500 Dow bottom holds. For now. It might be good temporary bottom, good enough for a trade or two. One more reason for optimism: CNBC poll results. 2/3 of all polled think that market can go down to 6000. This is a pretty good contrarian indicator. We might hold here for a while. Can we hold till the end of the year? Anybody's guess.

Why don't I think that we have a real bottom? First of all, I'll be insanely happy if it is. I still have significant long portion of my portfolio, and if market goes up, not only I would be happy, I'd make money. But I'm pretty sure that we are in Great Depression v2.0 now. There are a lot of entries in this blog about it. And I don't believe in real market bottom until acceptance sets in.

There is a lot of talk that stocks are cheap on valuation. So what? During and after Great Depression, they were insanely cheap on valuation, comparing any other time, including this one. Some data from last similar period.

September 3, 1929. Dow closes at the highest point to date: 381.17
October 28, 1929 (Black Monday). Dow closes at 260.64, dropping 38 points.
November 13, 1929. Dow closes at 198.69, lowest point for the year. 47.9% Drop from the high.

Looks pretty bad so far. But

July 6, 1932. Dow closes at 41.22, the lowest point of Great Depression.

November 23, 1954. Dow closes at 382.74, setting first new high after 1929.

So, market went down 89.2% from the high of 1929 to the bottom in 1932. And then it spent 22 years more to reach 1929 level. Should be especially comforting picture for buy and hold folks.

If we are really in GD 2.0:

Dow high for 2007: 14164.53, on Oct, 9.
Dow low for 2008: 7,552.29 yesterday (so far): 46.7% drop from high (hey, pretty close!)

Lowest point should be: around 1530, for 89% from the high. Impossible? Why?

Honestly, I don't think we sink that low. But the real bottom might be much lower than anybody thinks.

All numbers are from Yahoo! Finance.

Seeking Alpha Certified

No comments: