Charts of previous bear markets

Investment Analysis Clubs Macro Economic Trends and Risks
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Many people disregard John Hussman because he was so bearish after the Fed goosed the stock market. Hussman is deeply steeped in history and the Fed’s monetary stimulus was unprecedented. Take a look at this chart and realize what a kick all this fiat money gave the markets. Hussman deeply disagreed with the Fed’s policies so he blinded himself to the outcome.
https://fred.stlouisfed.org/series/WALCL

Now Hussman has learned to take the markets one day at a time.

Whether you agree with Hussman or not, you can’t fault his data. His latest essay has amazing charts of 4 major bear markets, 1929-1932, 1973-1974, 2000-2002, 2007-2009. Even if you don’t read the text, look at the charts.

“Aside from ignoring valuations and market internals, one of the behaviors that will get you eaten in a bear market is placing too much confidence in any single “capitulation.” Speculative episodes typically unwind in waves. The steeper the starting valuations, the more waves one typically observes… Collapses from speculative extremes tend to unfold as a sequence of capitulations followed by furious recoveries that can extend for weeks or even months. …”

This is a clear warning about bounces like the one in the stock market this week. Is this a true trend reversal from the decline in the SPX and NAZ that started in January 2022? Why would the trend reverse when the root cause of the trend (Fed QT and withdrawal of massive amounts of liquidity) has only just begun?

Only if inflation decisively declines to 2%, the Fed’s goal, will the Fed pause in its firm decision to raise rates and sell its assets. If they lose their determination and cave to the asset markets, inflation will resurge. It would be the 1970s all over again.

How will we know the market has truly captulated? I would look at 2 charts together: VIX and Financial Stress. They rarely spike together but when they do, it’s a sure sign of a financial crisis.
VIX > 40 along with Financial Stress > 1.5.
https://fred.stlouisfed.org/series/VIXCLS
https://fred.stlouisfed.org/series/STLFSI3

Wendy

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His latest essay has amazing charts of 4 major bear markets, 1929-1932, 1973-1974, 2000-2002, 2007-2009

You’ll note the worst is 4 years long. Keep 5 years’ worth of living expenses in something safe, and minimize the skim of trading in and out. That’s what creates wealth in the long run. We have a 200-year plus history that says the long term trend is up.

Even if you’re 60 or older, you’re likely investing for your heirs or charitable beneficiaries. Don’t let the short-term screw them.

intercst

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Now Hussman has learned to take the markets one day at a time.

Now Hussman can be wrong on a DAILY BASIS!!!

The Captain

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A different view of charts says we are close to a bottom. https://apple.news/A2GX_GvzGRXa-aPiJEuN2YA

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Sorry, I forgot to link the Hussman article. Here it is.
There’s a lot more here than simple chart watching.
https://www.hussmanfunds.com/comment/mc220601/

Wendy

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There’s a lot more here than simple chart watching.

The core of the article says:

From a long-term perspective, a security is nothing but a claim to a future stream of cash flows that investors can expect to be delivered over time.

which is entirely correct!

But, how do you determine it, “there’s the rub” as the Bard used to say.

To die — to sleep. To sleep — perchance to dream: ay, there’s the rub!

Back in 1934 when Graham and Dodd published their bible, Security Analysis, it was easy. Back then bonds were were investments and stocks were speculation. Analyzing a bond was easy, just use discounted cash flow. All the data was known, the interest rate, the coupons, the maturity date. The only unknown risk factor was whether the company could pay the interest and return the capital. This was dealt with by verifying that the company’s cash flow was sufficient to cover the payments.

Fast forward to stock investments and the data for the discounted cash flow analysis is NON-EXISTENT! You have to make it up.

• What interest rate to use? Prime rate is too low, it does not cover a risky operation. Just how risky is this business? Don’t really know but to CYA use a high interest rate which results is a low present value.

• What will the cash flow be? Don’t know, depends on sales, inflation, competition…

With old industrial companies the difficulty is not great, they will likely continue doing what they have always done. Brush your teeth, shave your face, wash your hair… But what about a growth company like Tesla? EVs are difficult enough to predict but how about AI, the robot, insurance, robo taxis. Just impossible to put real trustworthy numbers on them.

So you have to find new tools to deal with the new ways of doing business. What are they? The Science of Complexity, the Sigmoid or “S” growth curve, the Technology Adoption Life Cycle (TALC).

and a bit of simple chart watching does not hurt.

How to analyze SaaS companies? Have a look at David Skok’s video

David Skok of Matrix Partners: Driving SaaS Success Using Key Metrics

https://www.youtube.com/watch?v=bCBccKfG9U0&t=10s

The Captain

6 Likes