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Amateur Investors Weekend Stock Market Analysis (11/8/08)

http://www.amateur-investor.net:80/Weekend_Market_Analysis_Nov_8_08.htm

This week I did some research on previous Bear Markets going back to 1895 involving the Dow which has been around the longest of the three major averages. Typically a Bear Market is defined by a drop of 20% or more over a period lasting more than 2 months. Also I added an additional rule that each 20% drop must have been followed by a sizeable rally of 20% or more as well. A list of all of these occurrences is shown below. The average loss during a Bear Market has been 36.4% with the average length of 363 days.

Since 1895 there have been 33 occurrences when the Dow has dropped by 20% or more which was eventually followed by at least a 20% rally. Also keep in mind some of these occurrences happened within a longer term bearish cycle. For example from late 1929 through 1932 (highlighted in blue) there were 7 different occasions when the Dow dropped more than 20% which was followed by at least a 20% rally.

Meanwhile notice there have been occasions when the Dow hasn't dropped more than 20% for a substantial period of time such as from late 1921 through late 1929, mid 1949 through late 1961 and more recently from late 1990 through 1999. All of these time periods were then followed by an increase in the number of occurrences in which the Dow dropped by 20% or more. For example from late 1990 through 1999 the Dow didn't have any drops of 20% or more however since 2000 there have been 4 occurrences.

Dow Max Min Max Min % # of
# Date Date Value Value Loss Days
1 9/5/1899 9/25/1900 77.61 52.96 -31.8 384
2 6/17/1901 11/9/1903 78.26 42.15 -46.1 875
3 1/19/1906 11/15/1907 103.00 53.00 -48.5 665
4 11/19/1909 9/25/1911 100.53 72.94 -27.4 675
5 9/24/1912 12/24/1914 93.43 53.17 -43.1 821
6 11/21/1916 12/19/1917 110.15 65.96 -40.1 393
7 11/3/1919 8/24/1921 119.62 63.90 -46.6 660
8 9/3/1929 11/13/1929 386.10 195.35 -49.4 71
9 4/16/1930 12/17/1930 297.25 154.45 -48.0 245
10 2/24/1931 6/2/1931 196.96 119.89 -39.1 98
11 7/3/1931 10/5/1931 156.74 85.51 -45.4 94
12 11/9/1931 1/5/1932 119.15 69.85 -41.4 57
13 3/8/1932 7/8/1932 89.87 40.56 -54.9 122
14 9/8/1932 2/27/1933 81.39 49.68 -39.0 172
15 7/18/1933 10/20/1933 110.53 83.57 -24.4 94
16 2/5/1934 7/26/1934 111.93 84.58 -24.4 171
17 3/10/1937 3/31/1938 195.59 97.46 -50.2 386
18 11/10/1938 4/11/1939 158.90 120.04 -24.5 152
19 9/13/1939 6/10/1940 157.77 110.41 -30.0 271
20 11/8/1940 4/28/1942 138.77 92.69 -33.2 536
21 5/29/1946 6/14/1949 213.36 160.62 -24.7 1112
22 12/13/1961 6/25/1962 739.88 524.55 -29.1 194
23 2/9/1966 10/10/1966 1001.11 735.74 -26.5 243
24 12/2/1968 5/26/1970 994.65 627.46 -36.9 540
25 1/11/1973 12/9/1974 1067.20 570.01 -46.6 697
26 9/22/1976 3/1/1978 1026.26 736.75 -28.2 525
27 4/27/1981 8/11/1982 1030.98 772.17 -25.1 471
28 8/25/1987 10/20/1987 2746.65 1616.20 -41.2 56
29 7/17/1990 10/11/1990 3024.26 2344.30 -22.5 86
30 1/14/2000 3/22/2001 11980.50 9047.60 -24.5 433
31 5/21/2001 9/21/2001 11436.40 7926.90 -30.7 123
32 3/19/2002 10/10/2002 10722.80 7198.00 -33.0 205
33 10/11/2007 10/10/2008 14197.00 7884.87 -44.5 365
Average -36.4% 363 Days


Recently I have talked about Elliott Wave Analysis and when using this concept it can be applied to different timescales such as intra day, daily, weekly and monthly charts. After looking through several Bear Market charts going back to 1895 the current chart of the Dow most resembles that of the early to mid 1970's.

A weekly chart of the Dow from 1973 through 1976 is shown below and I have drawn in the Elliott 5 Wave pattern as well which was followed by an ABC type rally once the final 5th Wave down ended in late 1974. The total loss in the Dow from 1973 through late 1974 was -47%. Also notice that the final 5th Wave down only dropped slightly below the bottom of the 3rd Wave down that led to the development of a bullish looking Double Bottom pattern which was followed by an ABC type rally. From late 1974 through the early part of 1976 the Dow rallied 78% after the large drop from 1973 through 1974.



Meanwhile if we look at a current chart of the Dow it looks remarkably similar to that of the period from 1973 through 1974. In fact the Dow dropped nearly 45% from its peak in early October of 2007 through early October of 2008. Currently it appears the Dow is going through its 4th corrective Wave to the upside. The question is will the Dow follow a similar path like occurred in 1974 with the final 5th Wave down dropping below the bottom of Wave 3 down which will lead to the development of a Double Bottom pattern followed by a substantial ABC type rally like occurred from 1975 into the early part of 1976?



As I mentioned last weekend the Dow was in a very choppy trading range from the mid 1960's through the early 1980's with large moves in both directions however the Dow was at nearly the same level in 1981 as it was in 1966 so over a 15 year period the net gain was basically 0%.