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