The 1929 & 2007 Bear Market Race to The Bottom
Week 74 of 149
NYSE Margin Debt 1926 to 2009
Reduction of Company Listings on Stock Exchanges
13 March 2009
Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
We pulled back into the BEV-40% zone this week. How much of a correction we will get is the question we will all have to wait to see. Since we fell down to the BEV -40 Line last October, the Bear has been very miserly with his bear market bounces. Looking at the chart above, that has been the case since October 2007's Terminal Zero. The 1929/32 Bear let the bulls enjoy a nice bounce from Wk 11 to Wk 33 in the early part of 1930.
Our Bear, so far, has only known one direction - down. There have been no tradable bounces for the past year and a half. This is remarkable, as one must assume that the US Government have backed the bulls the full faith and credit of the US Treasury and Federal Reserve.
I can make a case for a strong rally here. But I've been saying that since last October.
Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.
Note: 2007 values are actually positive. They were inverted so 1929 would fit on top and 2007 on the bottom. So for 2007, please forget the negative valuations and focus on the percentages.
(Remember, with the 2007 data up is down and down is up!)
1929/32, Wk 74 200 Day Moving Average Volatility: 1.41%
2007/09, Wk 74 200 Day Moving Average Volatility: 2.00%
The 1929/32 Bear's volatility's 200 Day M/A did not break the 2.00% line until day 664 of its bear market. Our Bear breached this line on day 358! And now the 40 Day M/A has reversed course and might pass the 200 Day line soon. On 13 Feb 2009 the 40 Day M/A bottomed at 1.41%. It's now at 1.83% and closing fast on the volatility's 200 Day M/A.
Looking at this week's first two charts, I really surprised that the DJIA has fallen so little since October 2007. We see huge volatility but no tradable bounces for 18 months? BEV -60% by June 2009? I'm still thinking we will do it.
Historically, daily 1% swings from the previous day's closing price in the DJIA, while not uncommon, should not occur on an almost daily basis. The stock market is running a fever with its "Persistent, Extreme Volatility."
On Tuesday, we saw a 5.80% snapback against the Bear. Thursday was a good day too. Could this week be signaling the end of 2007/09 Bear? It could. As I'm stacking our bear against the 1929/32 Bear, let's compare their daily volatility on a curve from the largest positive to negative daily percentage moves.
I calculated, and sorted (highest to lowest) the daily closing price percentage moves for the 845 trading days of the 1929/32 Bear Market. As the 2007/09 Bear has only seen 359 trading days so far, I've calculated and sorted the first 359 trading days for the 1929/32 Bear for a comparison. The chart below shows the results.
Remember, in a Bull or Bear market, there are about as many up days as there are down days. The Step Sum tells us that. So it's expected that their are approximately as many positive as negative days during these historic Bear Markets.
I've been saying that the 2007/09 Bear is the most volatile in history. Look at my weekly volatility chart. The 200 Day M/A just keeps climbing and now the 40 Day M/A has turned around by almost 0.5%! But between the two bear markets, at Day 359, the 1929/32 Bear still holds the record daily percentage moves (up and down).
The 1929/32 Bear was a cold-blooded man-killer. On 06 Oct 1931, the market had an * up * day of 14.87%. This was the greatest daily percentage move for the 1929/32 Bear, a full 2% bigger than the bear's greatest * down * day in October 1929. That -12.82% down move on 28 Oct 1929 drove some people to suicide.
By October 1931, the 1929/32 Bear had lasted for 620 trading days. The DJIA closed at 99.34. It had fallen 73.94% from its 1929 highs of 381.17! How much worse could it get? A lot worse for the bulls who bought the DJIA at 99.34 on 06 October 1931!
They would see the DJIA fall down to 41.22 on 08 July 1932. That was a drop of 58% in the next nine months! Remember, BEV percentages are based upon last all-time closing highs. But on 06 October 1931, the DJIA was at 99.34, not at the market's highs of 381.17 two years before.
Well Mark, thanks for scaring the hell out of me! But like you always say, "there is nothing more bullish for the stock market than having the DJIA fall below its BEV -40% line." Excluding the current Bear Market (as we don't know how it will play out) that has been true for 7 of the 8 -40% DJIA Bear Markets since 1885. The 1929/32 Bear was a freak.
I would like to think like that too. Maybe the 2007/09 Bear will terminate somewhere above the BEV -60% line. I don't rule that out. But there are issues that really worry me.
1. The government regulators were so willing to look the other way during the Dot.Con, and Real Estate Bubbles. There was real criminal activity with the big NY houses. After 2000, even local hometown newspapers were reporting on these scandals. Hundreds of billions was stolen from the little people's 401Ks, IRAs, Union Pension funds, and etc, etc, etc. So who is the Justice Department prosecuting after 20 years of criminal activities in the financial markets? Bernard Madoff who stole what looks now to be less than 20 billion from big important people. Madoff didn't take just anyone's money. Only connected people were allowed into his fund.
The Madoff prosecution has a bad smell to it. He pleads guilty to 11 counts with no plea bargain? Just like that! There will be no trial, no pre-trial discovery investigation, and no public testimony of what the government regulators did and didn't know prior to public disclosure. For an ambitious prosecutor looking to make a reputation, this is a case of a lifetime. That is, unless what is to be found is damning evidence of political corruption at the highest levels of government.
2. There are over 700 trillion in OTC derivatives that no one knows anything about. I didn't buy any, did you? So who has them? Like so much in today's world, it's still a secret. But these OTC derivatives are specific performance contracts sold by Wall Street investment banks and AIG to someone. I suspect these contracts were sold to their clients in the S&P 500, NASDAQ 100 and DJIA. Maybe your life insurance company dabbled in the "risk management" market too!
The Chart above is for life insurance companies, not Full Line Insurance Companies like AIG.
The insurance index that includes AIG looks like this.
Most of these derivatives are interest-rate related. As interest rates are going to rise, if for no other reason than the US intends to print trillions of new dollars to bail out the writers of these contracts, I'm expecting to see the earnings of corporate American go negative before this is all over as they make their counter party payments.
Understand that this is just a guess from someone who knows only which way the wind is blowing. Still, I suspect that corporate profitability will one day flow down the same rat-hole in the NY Financial District that the Feds have already poured hundreds of billions into. The rats eat well in New York.
You can thank Alan Greenspan and Robert Rubin for this. During the Clinton Administration, these guys were the ones who insisted, before Congress, that there was no need to regulate the derivative markets. Congress, being Congress, believed what the heads of the Federal Reserve and Treasury Department told them about risk management in 1999. In 2009, the Congress still takes "experts" from the Fed and US Treasury seriously.
3. The US has a Socialist President (and Congress) who intend to "comfort the afflicted and afflict the comfortable." The Democrats' "Cap in Trade" (which is a carbon emissions tax) is going to make electrical rates, home heating bills and gas prices soar even without inflation. Air Conditioning in the Summer will once again become a luxury of the rich if Cap in Trade becomes law. "Policy" has never approved of cheap gas, so don't expect that either.
4. The stock market from 1982 to 2000 went up because the US Baby-Boomer generation was investing for retirement. They bought stocks for decades. From 2009 to whenever, the US Baby-Boomer Generation is going to be selling stocks to pay for their retirement. But to who? There may be chronic selling at depressed prices for years to come. Or maybe the selling will take place in one big climactic week.
Forget about #1-3. Number 4 is all that's needed to understand the immense downward pressure on the stock market that will appear in the not to distance future. Still, we can expect a few tremendous up days coming our way as they did in the 1929/32 Bear. Remember, volatility (up and down) is the calling card of massive bear markets.
We saw another sign of extreme volatility in Wk 74. As in Wk73 we had two 70% A-D days. In Wk 73 we had negative breath, this week they were positive breath.
Tuesday, 10 Mar 09, saw a +78.42% A-D Breadth Day
Thursday, 12 Mar 09, saw a +80.31% A-D Breadth Day
From April 1933 to February 2009 (with the exception of my data gap) these extremes in daily market breadth had occurred only 205 times. In the past two weeks we've added 4 more! And note how in the 1930s (a difficult market) there were plenty of positive breadth days too.
The data in the chart includes 16,760 trading days (excluding the gap). So these 209, 70% A-D breath days (+&-) occur 1.25% of the time in the sample. But from 1933 to 1939, 5.07% of these trading days were 70% A-D Breadth days. Today's Bear Market sees 70% A-D Breadth days 7.75% of its trading days since February 2007.
I don't have A-D Breadth data for the Great Depression Bear Market or for WW2. But for the data I have, this bear market is breaking records everywhere. I don't doubt that it will break the 1929/32 Bear's daily volatility records (up and down) before it is all over.
Since this market's Terminal Zero in October 2007, we really haven't had a decent bounce. The Step Sum is turning up now, and taking the DJIA with it - so far. But look at day 290, the Step Sum went up a nice bit and left the DJIA behind it. It was even worse around day 180 (inside the box) when the Step Sum had a significant rise but the DJIA ignored it.
In fact if you study the chart above, the pattern seems to be for the DJIA to ignore a rising Step Sum, while it blindly follows the Step Sum whenever it falls. This is very bearish.
Technical patterns don't last forever. So maybe this time will be different. But technical patterns can last long enough to become really annoying. Let's hope this 18 month pattern reverses itself and gives us a good bounce in the DJIA.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish the Step Sum will rise. When bearish, it falls.
Think of the "Step Sum" as the sum total of all the up and down price "steps" in a data series over time. An Advance - Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days while bear markets will have more net down days. Understanding the Step Sum is no harder than that.
NYSE Margin Debt 1926 to 2009
NYSE Margin Debt is money on loan from Wall Street to speculators (not investors) who chose to leverage their portfolio in the stock market. There is nothing wrong using leverage in a bull market. With a margin account at your broker, you can purchase $2.00 of stock for every $1.00 you have to place at market risk. The extra $1.00 is from the "margin loan" from the broker. Profits can be doubled with a margin account. Losses can be doubled too, as leverage is a two-edged sword.
Below we are looking at NYSE Margin Debt. As is typical with any dollar-defined data series that spans decades, inflation has rendered most of the data unreadable.
The BEV Chart below uses the same data as above, but is processed by my BEV Formula: (Data Point / Last All-Time High)-1. All time highs are recorded as zeros in a BEV Chart. The last zero of a bull market is called the "Terminal Zero." All other data points register as a negative percentage from their last all-time high. The BEV Chart strips away the decades of monetary inflation, uncovering much useful information.
I need to explain this data. From 1926 to December 1965 the data was weekly. Afterwards, it became monthly. Since 1965, the NYSE has also delayed releasing this information to the public by a month or two. Before 1966, each week had a different value. With the monthly data (post 1965) I filled every week of the month (4 to 5 weeks) with the same monthly value. This accounts for the difference in appearance before and after the red arrow in the above chart. The calculation of margin debt must be different. The last weekly value of 1965 was $2,180 million dollars. The next week Barron's publishes its first monthly value at $5,020 million dollars. I don't understand this jump. But I don't calculate the data, I only plot the data series.
We see huge drops of over 80% from 1929 to 1946. But not all drops of 80% in this BEV Chart are the same. I've plotted NYSE Margin Debt weekly series (1926 to 1966) with its BEV Plot in the Chart below.
The * decrease * in Margin Debt from 1929 to 1932 was over $6 Billion dollars! Total NYSE Margin Debt in 1965 was only $2.83 Billion at its greatest. The stock market from 1932 to 1965 had its ups and downs, but it was not as leveraged as it was in the 1920s. The 80% drop in margin debt during the post Great Depression market (1930s to 1947) occurred in an un-leveraged market place.
The same can not be said about the current stock market as we see below.
As in so many economic series, we see Dr. Alan Greenspan's hands in the data. So, did Dr. Greenspan's "injections of liquidity" blow up the stock market as grossly as his predecessors in the 1920s? It looks like he did, but from a NYSE Margin Debt to NYSE Market Capitalization standpoint, he did not.
At its most leveraged in 1929, Margin Debt was 6.99% of NYSE Market Capitalization. I only have NYSE Market Capitalization data up to February 2006. At that time NYSE Margin Debt was only 1.46% of NYSE Market Capitalization.
Margin debt is used by retail investors, so this chart is telling us that the public in 2009, for the most part has retreated from the stock market. But the "policy makers" are making money available to retail speculators for purchasing stocks.
It's a bear market. Rational people are not interested in leveraging their losses, even at rates not seen since 1951.
Reduction of Company Listings on Stock Exchanges
The chart below shows the number of companies trading on the NYSE from 1939 to 2009. I wish Barron's published this data from 1929.
The above data points are derived from Barrons' A-D data. I simply added the advancing + declining + unchanged shares for the week. Again we can see where Dr Greenspan had control of the money supply. Wall Street went wild with its IPOs.
This chart is interesting. Greenspan's bubble financing increased the number of listed shares on the NYSE by 66% from 1991 to 1999. But in the last 10 years the number of companies trading on the NYSE has decreased by 14%. Most of this drop happened in June 2008. Did the sub-prime mortgage crisis do this? I don't know.
My next chart is for companies trading on the NASDAQ. The NASDAQ may be home to Microsoft and Google, but small, single product-line companies that can double in a year are also found here.
Institutional money is prohibited from investing in such companies, so the existence of these high risk speculations is an indication of a healthy retail market in stocks.
The listings at the NASDAQ have returned to where they were during the first year of Ronald Reagan's Presidency. I take this to mean that the public is mostly out of the stock market in general.
If I'm correct, corporate earnings will disappear in the next few years. So looking at statistics unrelated to valuations may prove to be useful in calling the bottom of our current bear market.
I look at these charts every week when I update my data from Barron's. We should see a continuation of delisting companies on both the NYSE and the NASDAQ if this Bear lasts the 845 trading days the 1929/32 Bear Market did. We are currently only 359 days into this Bear Market, and I see no end in sight.
13 March 2009
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.
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