Daily Investment Interpretations

September 22, 2008

2008-9-22  The price of crude oil leaped $16 a barrel today to $120 a barrel, setting a new all-time, one-day, price-hike record, while the markets gave up today what they gained on Friday. The Nasdaq dropped 95 points to ~2,179, the Dow lost 372.75 to 11,015.69, and the S&P 500 sacrificed 48 points to ~1,207. The indices are off about 23%, and are officially in bear country. Meanwhile, the VIX closed the day at 33.85--well above its 20-ish levels a month ago.
    Bummed out about having to use the children's college money or your retirement savings to help pay for the yachts and private jets of the high-rollers who cashed in on their Ponzi schemes and are now making you pay to cover their debts? So am I, but I'll concentrate here on what's going on, and where things might go from here.
    Here is an article by Todd Harrison, Minyanville : Market Commentary, Investing Ideas, Global Finance, The Economy.
    In the article, Mr. Harrison presents two charts, the first of which is haunting. In the first chart, Minyanite Kevin Depew overlays the current S&P 500 chart on the S&P 500 chart for the great 1974 bear market. (I'm reproducing it here in case it expires on its present site.) Note that the chart depicting the current stock market profile starts 7 months plus a week later than the 1974 (1971-1976) stock market history. The S&P peaked in January, 1972, at before entering upon its disastrous 48% decline, while it peaked on July 17, 2007, and again, higher, on October 11, 2007, in the current cycle. The Dow peaked at 1,051 in January, 1973, and then fell 45% to 577 around the first of October, 1974. In terms of our current situation, this chart evidently ends when the S&P 500 bottomed last Wednesday. Then on Thursday and Friday, the markets jumped about 8% in two days, or not quite as much as they did in the comparable February-to-March, 1973, time interval. A corresponding situation here is that the markets would remain range-bound for the next month before starting a steep decline to something like 850 on the S&P, arriving there around the end of April, 2009. Then if past is prologue, it would hang there into June, 2009, before starting a climb that would bring it back in March, 2010 to about where it is now. It would be 2011 before the markets really recovered to their 2007 high water marks.
    It will be interesting to compare this 1971-1976 S&P 500 chart with what actually transpires over the two or three years. 
    Of course, this is a once-in-a-century crisis, and is more traumatic than was the state of affairs in 1974.

    The second chart in Todd Harrison's article illustrates that banning short-selling doesn't prevent stocks from going down.