Change text size

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

I have mentioned often in recent months about the “gloom and doom” attitude pervading the economy and the stock market of late. In the process I have also pointed out that the stock market rarely experiences a major bear market when everyone is already down in the dumps. It seems of late that there are exceptions to every rule. As of 1/11/08 the Dow is a full -11% off of its 10/9/07 high. And it hasn’t been pretty. Any number of sectors are down -20% or more. And of course then there is the housing “crisis.”

One problem with this – the Information Age – is that everything gets magnified, especially the bad news. So a decline of 11% feels more like about 30%, because as the market declines we simply continue to hear worse and worse news and more and more reasons why the decline will continue ad infinitum. This weekend I contemplated rummaging through the attic to see if I could find an old “The End Is Near” body board and then taking a stroll. Fortunately it did not come to that. Which is good, because my neighbors are already starting to wonder about me.

Anyway, the question I want to raise this week is, “Are things really so bad?” Now if there were sound in cyberspace a cry would go up shouting, “are you kidding me?  Haven’t you read the news?!  Everything is terrible!”  And perhaps everything is terrible. Perhaps any light at the end of the tunnel is simply the proverbial oncoming train soon to deliver a crushing blow. But what if told you that what is going on now is relatively “normal”?  You’d probably start to wonder about me - just like my neighbors. Nevertheless, one thing that is sorely missing in today’s world in a little “historical perspective.” Collectively, we don’t care what happened in the past. We want it all and we want it right now and if we can get someone to just give it to us, well then, all the better. During the bull market of the past quarter century – has it been that long – a lot of folks have built up the idea that they are “entitled” to a certain return in the stock market. Well, I hate to be the one to break the bad news, but it doesn’t work that way. And, oh by the way, a decline of 11% or more at about this time in the four-year election cycle and the 10-year decennial cycle is not the least bit uncommon. More on this topic in a moment.

Watch the VIX

My personal bent at the moment is that the market has further to go on the downside (of course, I hope I am proven wrong on this one), but that the decline will ultimately prove to be a buying opportunity.

First, here is my fearless, throwaway predication: the current decline will not end until the VIX shoots back above 30. While there is inarguably a lot of “gloom” prevalent in the market these days, there seems to me to be still a certain lack of “fear.” Chart 1 displays the S&P 500 index versus the VIX.

Chart 1 – S&P 500 versus the VIX Index

Note how the VIX spiked higher at the August low and to a lesser extent in November. So far during the latest sell off the VIX has merely “drifted” higher. My own subjective, highly unscientific interpretation – this ain’t gonna cut it. Before the market puts in a meaningful bottom some of the dead wood is going to get shaken off.

Late Decade Market Action

Now consider the following historical tidbit: during 8 of the last 10 decades, the Dow has experienced a sell off of meaningful proportions during Year “7” or Year “8” (9 out of 11 if you include this decade). In the 1990’s, the Dow fell –14% between October of 1997 and -21% between July and September of 1998. In 1987, the Dow plunged –36% between August and October of 1987. In 1977 the Dow declined 27% between January of 1977 and March of 1978. And so on and so forth. The 1920’s and the 1960’s were the only decades not to witness a meaningful market decline during Year “7” or “8.”

So the bottom lie is that one could argue that a market decline in this particular timeframe is not “the end of the world,” but simply a fairly normal “pause that refreshes.” To wit, consider the action of the stock market between the end of February of Year “8” and the end of September of Year “9” during all decades in the past century. In other words, what if an investor “bought the Dow” (i.e., the Dow Jones Industrial Average) at the close of the last trading day of Year “8” of each decade (1908, 1918, 1928, etc.)  and then held for 19 months before selling at the close of trading on the last day of September of Year “9.”

These results are depicted in Table 1.

Table 1 – The Dow between February of Year “8” and September of Year “9”

Chart 2 displays the growth of $1,000 invested only between the end of February of Year “8” and the end of September of Year “9” since 1900.

Chart 2 – Growth of $1,000 invested in the Dow between February of Year “8” and September of Year “9”

As you can see in Table 1 and Chart 2, the market has shown a strong tendency to stage a “late rally” during the decade.

Will the same thing happen this time around?  Unfortunately there is no way to predict the answer. The one thing this information should do is to remind investors to look at this current market decline as a potential buying opportunity rather than “the end of the world.” If the market falls further and the VIX spikes higher in the not too distant future, it may be “time to keep your head” time.

As always, time will tell.


To search for previous articles written by Jay Kaeppel, please click here.

Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Recent Articles by Jay Kaeppel, Optionetics.com

• November 4, 2009
  Kaeppel's Corner: What's Your Plan?
• October 28, 2009
  Kaeppel's Corner: "Energize" Your Portfolio
• October 21, 2009
  Kaeppel's Corner: Spotting Opportunity (That the Masses Are Sure to Miss)
• October 14, 2009
  Kaeppel's Corner: Three Strategies You Probably Have Not Considered
• October 7, 2009
  Kaeppel's Corner: The Creative Bull