Bear Market Rallies

Although the longer-term outlook for share prices remains bleak, it is worth bearing in mind that markets rarely move in a straight line.

Even during the Great Depression, when the Dow Jones Industrials Average lost nearly nine-tenths of its value over the course of three years, there were numerous upside corrections during the period.

In fact, the following chart, courtesy of AlphaTrends, details eight double-digit percentage-point rallies that took place from 1929 to 1932.

As someone who has been around markets for a while (with plenty of scars to show for it), it is hard for me to look at the level of extreme pessimism and the number of indicators flashing "oversold" in today's equity markets and not think prices are probably due for one of these periodic, hope-breeding rebounds.

That doesn't mean I've turned bullish, of course. Just realistic.

Comments

[LFainstadt]

Talking heads, pretty cheerleaders,excited gavel kings at the end of the day, leave nothing on the table except an old table cloth and hands clasped in prayer. Those days were behind us and now they have caught up. Lord give us this day our daily bread without one more talking head.
The day has been long when the span was green and the interest was at 2%. Now it seems the two percent represents the standings of the President and Congress. Panzer was right all along and the greed kept them from seeing the truth.

[Steven]

Of course you're right. I see the same thing. Too much pessimism always breeds a rally and I will be on the right side of it as will, I suspect, you be. Once I discovered to throw ideology out the window, I started making money in the markets. While I maintain a downward bias, my short profits have been taken, I sit in cash and just wait for the buy signal, which may come in as little as 30 minutes. When it does, I intend to profit on the way up before taking profits and re-entering my short positions. Ahhh, this can be so incredibly easy when one is detached from emotion and ideology.

[Kash N Kari]

Steven,

What are you going to sit in, besides your soiled undergarments, when the dollar's wiped out? All those winnings will be meaningless. It's like bragging that you have first class accomodations on the Titanic after all of the lifeboats have departed.

Unlike previous recessions, depressions and assorted panics, we won't be coming back from this one, so no one really wins.

[Investorazzi.com]

Nice points, Michael. Marc Faber, aka Dr. Doom, also thinks that equities are oversold. From the CNBC website Tuesday:

The stock market is as oversold as it has been since the crash of 1987 and the broader market could start to rebound until early next year, Marc Faber, editor and publisher of the Gloom Boom and Doom Report, said Tuesday.

The market is possibly in "the most oversold condition" since perhaps Oct. 19, 1987, Faber told CNBC's "Squawk Box."

Market crashes typically occur just when people think its already oversold...

[John Kaighn]

The events we are witnessing during this financial meltdown will definitely be considered a historic event, as the stock markets around the world unwind in a whirlwind of panic selling. The close on October 9, 2008 has the major US indices firmly in bear market territory and the market is bordering on being absurdly oversold, which usually marks the capitulation and bottom of a bear market. It would be quite ironic if this level held as the bottom, especially since the all time highs for the DJIA and S&P 500 were set a year ago to the day. At this juncture, the DJIA is 39.4% off the October 9, 2007 high, while the S&P 500 is 41.9% below its peak. As is usually the case during market downturns, the NASDAQ is now 42.5% below its high water mark, which was set on October 31, 2007.

At the time of this writing, futures are indicating a drop at the open of the US markets, while Asian and European markets are 7% - 10% lower. A large part of the selling is due to deleveraging by hedge funds and others who overextended during the credit bubble. Margin calls cause investors to come up with more cash or sell assets. It looks like asset sales are the order of the day. I'm sure there are many smaller investors who are also selling, following the herd and fueling the panic.

Just as irrational exuberance has faded and illogical pessimism has become the mantra for the day, the trepidation investors are feeling now will elapse and calm will be restored. Real damage has been done to the portfolios of millions of investors around the world, and bailing out at this point, especially if you don't need the cash today, is foolhardy at best. Besides, if the market were to drop over 50% and the government went bankrupt, which was a rumor in the trading pits yesterday, what would the cash under your mattress be worth anyway? Of course, you could always buy gold at over $900.00 dollars an ounce, because doesn't that just ALWAYS keep going up? You know, like stocks, housing, oil, commodities and of course, tulips!

John H. Kaighn

Jersey Benefits Advisors

The Kaighn Report

[Adron]

Tulips. Yeah. I'm buying tulips dammit! :)