A few commentators have been particularly insightful during this time of wrenching declines across stock markets; it's a pleasure to pass along their thoughts.
Henry Carstens has posted an interesting chart that captures a 10% "drift channel" in stock market prices that reflects the long-term growth rate in equities as identified by the Dimson et al research. What is apparent from the chart is how far above that trend line we have risen in recent years. Henry opines that this unusual rise is attributable to the introduction of high leverage into markets via investment banks and hedge funds. With the credit crunch, we're seeing a massive unwinding of this leverage, which is returning us toward the "fair value" represented by the drift channel. Should we overshoot this channel to the downside, that might constitute a measure of longer-term investment opportunity.
In the interim, Rennie Yang of Market Tells notes that counter trend patterns in markets that had been reliable trading indicators have completely broken down in recent days. He explains to readers, "One of the key takeaways from the past six sessions, in which the S&P has plunged a staggering 250 points, is that normally reliable counter-trend trading setups have been absolutely crushed. Yet when we look at the daily chart of the S&P500, we still have not seen a real 'range expansion' bar - a down day that really stands out - despite the flurry of 3%+ down days (eight in the past month). Anecdotally, I'm surprised that so few reporters and/or bloggers are discussing the potential for a crash from current levels. Most reiterate common investment themes such as "don't panic", "it's too late to sell", "almost certain to see a bounce soon", etc." What has been clear, Yang notes, is that lower prices have not attracted buying, as the Cumulative NYSE TICK and advance-decline figures hit bear market lows.
Rob Hanna of the Quantifiable Edges blog reviews patterns of reversal in market washouts as a guide to what to look for should this market not just go to zero. One pattern that has marked these bottoms is that strength/buying off the lows has led to further strength and buying, as value-oriented investors have leaped at opportunities. Thus far, as I noted recently, bounces in market money flow (such as we saw last week) have been selling opportunities and rallies off lows have been quite temporary. We won't really know when we've bottomed until we've seen a reversal off price lows that doesn't invite renewed selling.
As of this writing, markets around the world continue lower. I will be using the Twitter application to update market perspectives and developments. Thanks to readers for the positive comments about the Twitter posts; my best wishes go out during this time of turmoil.
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Friday, October 10, 2008
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7 comments:
It appears that the banks may be nationalized. I am a member of Myinvestorsplace.com and we are concerned about the true meaning of "nationalizing". We're looking for answers and suggestions. Thanks.
Does anyone think that the ban on short selling may have contribted to the lack of "bounce" in the market.
Traditionally the bears bet ahead of themselves and the process of short covering ends up flooring the market and providing some buying impetus.
Currently we have a complete buyers strike
I certainly am one of those bloggers who say "don't panic," as you noted; however, my perspective is not that of the classic investment advisor screaming "buying opportunity!"
The true "perspective," Dr. Brett, is that money should not even come close to the top of priorities or items that provide meaning to life.
If we "panic" then we are displaying our value for money, which, for most Americans, is already too high. If, through our stress and despondency, we reveal to our children at the dinner table tonight that our life has less meaning because we now have less money, then we perpetuate the problem.
Where are our values? Would we rather have good health or good wealth? Do we value strong personal relationships or strong personal finance?
"What is to give light must endure burning." ~ Viktor Frankl
"When we are no longer able to change a situation - we are challenged to change ourselves." ~ Viktor Frankl
What a load of crap in the above comment. Money DOES matter specially for those of us that have little of it.
I am seeing thousands of hours of my work disappear, that they could have been much better spent enjoying my kids growth. The irony is that my (an theirs) sacrifice was exactly to give them a better education and future. Now all of that is gone.
"Would we rather have good health or good wealth?" Can't you see how they are related? Lose your your medical insurance money and see what happens to your health.
So yes, money does matter unless you have so much of it that losing a big chunk won't affect the lifestyle of your family and the possibilities you dream for their future. If that's your case then it's easy to be nonchalant and philosophical about it.
RE: Henry Carstens 10% "drift channel" Chart
=> On a log scale, the 2003-2007 bull is on the lower channel.
This brings up a question -- are chart patterns better viewed in log or non-log scale ? I would imagine that the longer the time period, the more that these two kinds of representations differ.
You might want to take a look at what this "reverting to the median" band looks like when taken all the way back to 1939. The growth rate is 8.12% per year and the encompassing band is 44%. We're now close to the bottom boundary.
Guru -- interesting, and a very clean chart.
I know it's difficult to do, as there are many inflation measures, and as their definitions may change over time, but one wonders what this kind of chart looks like when adjusted for some measure(s) of inflation.
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