Sunday, February 17, 2008

Optimists are out in force

In the last ten days, 13 more people have voted in my online poll, and 12 of them (92%) think the Dow won't dip any lower than 9000. This is more optimistic than the first 16 voters, as only 11 of those (69%) made the same prediction. If this small sample is representative of investors generally, then the market mood has become more optimistic, and this makes the market more vulnerable to further drops.

Sunday, February 10, 2008

April 8, 1999

What's special about April 8, 1999? On that date, the S&P 500 index closed at 1343, or 12 points higher than last Friday's close of 1331. In nearly nine intervening years, long-term stock market investors were rewarded for their patience with .... a 1.7% average dividend yield.

This is another way of looking at why I think we will see more long-term investors give up on their mutual funds. It's one thing to ride through two bear markets in one decade, but it's another thing entirely to collect almost no dividends in the meantime. Even those who survived the great depression were rewarded with 10% dividend yields once that bear market ended in 1932. Today's investors, on the other hand, can't see any significant dividends on the horizon, and have to live with the fact that a 3% savings account in 1999 would have resulted in better returns and fewer headaches than their stock funds.

Wednesday, February 06, 2008

Poll results so far

I've placed three questions on the right panel of this blog, and although the number of respondents so far is small, (7, 9 and 16) I'd like to highlight the trends now before the market dips into the next phase of the crash.
  • Out of 16 responders, 11 believe that the Dow will bottom out above 9000, which is above my predicted low of 8500. Two answerers think the Dow will drop below 7000.
  • Only six visitors were willing to divulge what types of investments they were in, and all of them indicated they were at least partially invested in stocks or regular mutual funds. I predict that many of these holdouts will be bailing in the next month or two as part of the crash down to Dow 8500.
  • Nine people ventured a guess as to what the next bubble will be, and four of them agreed it would be emerging market stocks. I take this to be a contrarian indicator, since people tend to avoid investments that scare them, and anything that investors avoid will have a hard time inflating into an overvalued bubble.
The "Dow" and "investments" questions will expire in a couple of weeks, since I'm sure the answers will be very different at the end of a crash. On the other hand, the next investment bubble may take years to materialize, so that question will remain up for all of 2008.

Tuesday, February 05, 2008

The Decadal 6-7-8 Crash

There is a long-term repeating pattern in the U.S. stock market that nobody seems to talk about. The market always experiences a bear market or a crash (19% or more) once every decade, in either the 6th, 7th, or 8th year of the decade. This seems to happen regardless of the condition of the economy or the P/E ratios of stocks.

Here's how the cycle has played out so far:
  • 1937-8: 49% bear market
  • 1946:... 22% crash June-Oct.
  • 1956-7: 22% bear market
  • 1966:... 22% crash Feb.-Oct.
  • 1976-8: 27% bear market (Dow)
  • 1987:... 35% crash Aug.-Oct.
  • 1998:... 19% correction July-Oct.
The 1976-8 bear market followed the -45% bear market in 1973-4, and the 1937-8 bear market followed the -89% bear market in 1929-32, so the 2000-2002 bear market (roughly -40%) has not immunized us against another large loss.

Until October of 2007, this decade had yet to experience the big 6-7-8 bear/crash:
  • 2006: Up 11% for the year, 8% correction in June
  • 2007: Up 4% for the year, 9% correction in August
Right now we're still only 12% off of the October '07 high, so if this is the first part of the 19%-49% drop predicted by the 10-year cycle, then the market is poised to fall at least as far as S&P 1270. (Dow 11500) Of course the market can fall much further than 19%, and I'm predicting a bottom of Dow 8500/ S&P 940.