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Recap of the 1974-1975 Bottom


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#1 IndexTrader

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Posted 16 April 2009 - 12:14 PM

I thought I would post this because 1) I was trading at this time and 2) this was a serious recession, perhaps the most serious recession post 1929, and certainly post WWII. In terms of the stock market, the Dow had declined about 50% from 1000 to 550. First, the background to the bottom was horrible. If you will recall, Richard Nixon was impeached, earnings were falling sharply. We hit 550 on the Dow in October 1974. We then bounced to 600 or so. And by the way here, if I'm off a little I'm doing this from memory...it will be pretty close. We started back down from there, and in December 1974 hit 550 again, and in fact, if memory serves we hit new lows, amidst a chorus of folks predicting things like 300, 200, etc. We then turned again and started up. By January 1975 we were streaking up. Not many down days. I remember we gapped around 680 on the Dow, a gap which remains unfilled to this day. Of course, after that, everyone said it was going to be filled. We continue to rally until July, 1975, when we hit 880....about 60%. Keep in mind the entire time was very bad news....to include the fact that New York City was about to go broke. In fact, it was in those days that MGIC insurance began to insure municipal bonds, along with AMBAC, another insurer. New York City dominated the headlines, day after day, as it neared default of one sort or another. During this time, we started to correct. All sorts of arguments as to whether it was a bear market rally, a cyclical rally, a secular rally, etc etc. Of course, if you were long coming off that bottom, you made so much money so quickly that it really didn't matter what type of rally it was. The correction was about 10%+, down to about 790. It took the remainder of 1975, around 6 months. Then in January of 1976, we took off again, and in maybe 3 months or so streaked up another 25% to 1000 on the Dow. The Dow in other words had nearly doubled. By the time we got to 1000, the fundamental news had improved significantly. Earnings were growing. New York City escaped bankruptcy, etc etc. I'm not necessarily comparing this to the current market. But I am saying that markets are always forward looking. Today we see the market rallied for instance, and CNBC says a report that was released that day was better than expected. So many of us assume that that's why the market rallied. When in fact, the market may well be focused on the perception of what will happen several months down the road. So before you decide that you can play the market by reading the newspaper, just remember that we had a market that doubled after a very serious recession in the 1970s, amidst very bad news most of the way up. You make the big money by looking ahead, not looking behind. And afterall, that is what technical analysis is supposed to do. Charts supposedly reflect the sum total of investors perceptions as a point in time, and the nature of that chart supposedly forecasts what is coming down the pike. Whether this market is different because we have a credit crises, I could not say personally. Is the market cheap or expensive? Who knows. Focus on the charts. That's where the answer is. IT

#2 inamosa

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Posted 16 April 2009 - 12:17 PM

Thank you. You've just made an awesome post. Cheers
"Our job is not to predict where the market will go, but to interpret daily price and volume action to ascertain the facts of the current environment and make decisions based on that interpretation."
-Scott O'Neil (son of William O'Neil), Portfolio Manager at O’Neil Data Systems, when asked where the Dow would go in the coming months

#3 PrincelyM

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Posted 16 April 2009 - 12:22 PM

Very good post. Thanks for writing this.

#4 humble1

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Posted 16 April 2009 - 12:28 PM

why do you suppose so many folks here and everywhere who "focus on the charts" have been so bearish since spx 667? isn't t/a ALONE supposed to be clear enough so that there would be no dispute about a rally of that percent about to happen? could it be that when you "focus on the charts" you ignore the monetary background and that if you don't understand the system and what is happening now that you will get your butt kicked into the next ice age, as is happening to ricky santelli and jimmie rogers? maybe it is more like "the technicals must confirm the fundamentals". there HAVE BEEN signs of the recovery for those who listen and think and watch closely and know a little about calculus.

#5 Gary Smith

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Posted 16 April 2009 - 12:37 PM

Yes, good post IT. I too was trading back then but was too young, dumb, and undercapitalized to exploit it. What I remember most is the run in small caps beginning at the end of 1974 where they went on to acheive something like 33% per annum for something like 5 or 6 years running and clobbered the Dow and S&P in performance. While many date the great bull of the 80s and 90s to August 1982 many analysts from yesteryear such as Norman Fosback date it to October/December 1974 where the average stock made its bear market low.

Edited by Gary Smith, 16 April 2009 - 12:38 PM.


#6 denleo

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Posted 16 April 2009 - 12:43 PM

Whether this rally is the beginning of the bull market or not, it is a great post. I am sure 1933 and 1982 rallies felt exactly the same -- how can it go up when the economy is falling apart. Thanks IT. Denleo

#7 ogm

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Posted 16 April 2009 - 12:44 PM

So in retrospect what do you think the market saw at the 1974 bottom ? Volkers anti inflation poolicies taking hold ? What was the reason for recesssion and market drop in the first place ? Inflation ? Drop in production following the end of Vietnam war ? I can tell you what I see ahead .... More iundebted consumer that can't repay debt that they have accumulated over the past 20 years. Continuing wage differential with Chindia that will pressure wages and employment as far as an eye can see. No more stimulus programms with the next election getting closer day by day. I'm looking forward and beyond the short term blip from stuimulus I see nothing. Just huge government debt and continuing economic probelms. There is no private money, this whole "recovery" is based on some shaky and dubious government programms. That may or may not exist in the future. The system of the excessive leverage that was fueling the economic boom of the past 20 years is alos gone. What is there to look forward to ? Give me 1-2 good reasons. I'm bearish not because the news today in the newspaper is bad.. I'm bearish because I look into the future and don't see anything to be bullish about.

Edited by ogm, 16 April 2009 - 12:46 PM.


#8 ogm

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Posted 16 April 2009 - 12:53 PM

Here is what I need to be bullish... I want to see consumer that has cleaned up balance sheets and can take on leverage. Has excess savings that they can invest into the market. I want to see financial system that can expand leverage. New revolutionary technology that has accompanied every bull market, like Railroads, Automobile, Computers/internet. Every bull market has a technological revolution behind it. These are 3 main things. Where will the money come from to drive the market ? It has to be savings or increasing leverage. And there has to be a massive driver to create broad economic demand that increases economic activity across broad number of sectors. All this government intervention is temporary and creates no serious lasting demand. Sure they'll save some jobs and pop some economic numbers for the short term.. but whats beyond that ? Without these factors its all hope hope hope. CNBC is full of idiocy, like.. "the markets go up 6 month before economy turns and no one knows why" ... bullsh*t... Its always known why.

Edited by ogm, 16 April 2009 - 12:55 PM.


#9 Data

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Posted 16 April 2009 - 12:58 PM

Burns was the Fed chair, not Volcker. The Saudis ended their embargo of crude in the spring of 1975. Perhaps as a result of this, Burns started cutting interest rates and inflating the money supply about nine months before the market bottomed. In 1975, they had a 5% homeowner credit, tax rebate checks, increase in working persons tax credit, etc. Most families were single-earner before the great inflation of 1975. Wives went to work because of the inflation, and the higher household incomes contributed to housing recovery and higher inflation.

Edited by Data, 16 April 2009 - 12:59 PM.


#10 Bullryder

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Posted 16 April 2009 - 01:00 PM

One of the best posts ever, IndexTrader. Thanks.