From the low in the 2nd year of every Administration since 1914, the market has staged an impressive rally to its high the following year, with even the stodgy old Dow averaging a 50% gain in that rally. This is the 2nd year of this Administration.
Putting it all together a pretty good case can be made for a new bear market low by next fall, providing opportunity for substantial gains from the downside, but with that low being the bottom of the bear market.
And for that low to be followed by a super rally off oversold conditions, which would tie in with the history of a big rally off the low in the 2nd year of every Administration since 1914, and which would be the first leg up of the next bull market.
But we do not believe the downside will be in a straight line. With economic numbers, earnings reports, and turmoil in international situations and currencies (including the U.S. dollar) likely to continue to alternate between good news and bad, the market is likely to stage one or more rally attempts, most likely with timing that will fit in with the tradition of a summer rally.
We expect that market-timing of intermediate-term moves will continue to be the way to handle this market. Remember that even while the bear market continued, the Nasdaq had two bear-market rallies last year in each of which it gained more than 40%, even though it ended down 21% for the year.
L. W. Chi
We've left the NASDAQ until last, as it certainly has had a mind of its own over the last five years.
At its low last September, the Nasdaq was down 72% from its previous peak. Since there have only been 8 bear-markets during the NASDAQ's existence, it's difficult to qualify its current decline on a historical basis, but 72% would certainly seem to qualify it as having met the requirements of a serious bear market, and it was its largest decline since its inception. But some have made estimates that in the worst bear markets of the past the smaller speculative over-the-counter (OTC) stocks plunged 80% to 90%. However, it's difficult to do more than guess, as there was no index of speculative stocks to record their action. It's also inaccurate to equate the 'new' Nasdaq with the OTC of previous decades.
In the past, as soon as a company whose stock traded in the OTC market, grew financially stable enough to qualify for listing on the NYSE, it immediately moved to the NYSE. There it would have more 'sponsorship', since the 'prudent man' rule of many pension plans and insurance companies did not allow them to invest in OTC stocks, which were mostly speculative in nature. (They were mostly speculative in nature because the migration of companies to the NYSE as soon as they could qualify for listing there, left only under-capitalized and speculative stocks trading OTC).
But in the last bull market, many OTC companies, led by Microsoft, Intel, etc., grew well past qualifying for NYSE listing, but opted to continue trading on the NASDAQ, and then went on to become some of the largest, best capitalized companies in the world. So it's difficult to estimate how much such an OTC market constituted as the present NADAQ Composite is, would have plunged in previous bear markets. A decline of 72% seems like a lot, but the valuation bubble in NASDAQ stocks was so huge that the P/E ratio remains extremely high, although also impossible to measure because the majority of NASDAQ stocks have losses, not earnings.
The evidence says the bear market has not completed its work. The Dow and S&P 500 have not approached the percentage declines they suffered in previous serious bear markets. They also remain at high valuation levels like P/E ratios, usually associated with market tops, not bottoms. Miscellaneous items like consumer confidence, unemployment rate, etc., remain at levels more often associated with market tops than bottoms. Investors have still not lost their hope and expectations for a quick return to the conditions and easy money of 1999.
Potentially important points:
The market is now in its unfavorable seasonal period until next fall. The majority of previous bear markets ended in the second half of the year, not the first half. Most notable or recent: The 1973-74 bear market ended in early December. The 1981-82 bear market ended in August. The 1987 crash, 1990 bear market, 1998 mini-bear market, all ended in October. Even last year's late year bear-market rally began at the September low.
Free! Why The Bear Market Is Not Over! May 6. Sy's book Riding the Bear came out in March, 1999, predicting a serious bear market was just around the corner. We subsequently sold the Nasdaq short as it crossed 5,000 (calling for a 35% plunge). We caught both big rallies last year, and sold short for the summer decline. Here's why we believe more of the same, big downs and ups, lie ahead.
L. W. Chi