Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20
U.S. Long Bond: Let's Review the "Upward Point of Exhaustion" - 27th Jun 20
Gold, Copper and Silver are Must-own Metals - 27th Jun 20
Why People Have Always Held Gold - 27th Jun 20
Crude Oil Price Meets Key Resistance - 27th Jun 20
INTEL x86 Chip Giant Stock Targets Artificial Intelligence and Quantum Computing for 2020's Growth - 25th Jun 20
Gold’s Long-term Turning Point is Here - 25th Jun 20
Hainan’s ASEAN Future and Dark Clouds Over Hong Kong - 25th Jun 20
Silver Price Trend Analysis - 24th Jun 20
A Stealth Stocks Double Dip or Bear Market Has Started - 24th Jun 20
Trillion-dollar US infrastructure plan will draw in plenty of metal - 24th Jun 20
WARNING: The U.S. Banking System ISN’T as Strong as Advertised - 24th Jun 20
All That Glitters When the World Jitters is Probably Gold - 24th Jun 20
Making Sense of Crude Oil Price Narrow Trading Range - 23rd Jun 20
Elon Musk Mocks Nikola Motors as “Dumb.” Is He Right? - 23rd Jun 20
MICROSOFT Transforming from PC Software to Cloud Services AI, Deep Learning Giant - 23rd Jun 20
Stock Market Decline Resumes - 22nd Jun 20
Excellent Silver Seasonal Buying Opportunity Lies Directly Ahead - 22nd Jun 20
Where is the US Dollar trend headed ? - 22nd Jun 20
Most Shoppers have Stopped Following Supermarket Arrows, is Coughing the New Racism? - 22nd Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Stock Market Recovered in 1994, 1998, and 2004

Stock-Markets / Stock Markets 2011 Aug 08, 2011 - 02:56 PM GMT

By: Chris_Ciovacco

Stock-Markets

Best Financial Markets Analysis ArticleOur July 27 article, How Will A Downgrade of U.S. Debt Impact Stock and Bond Prices?, is obviously more relevant now. Since the news of Standard and Poor’s (S&P) downgrade of U.S. debt on Friday night, we have been reviewing the market’s current risk-reward profile and preparing for what should be another volatile week for investors.

On Sunday, we revisited our study of points in market history that are similar to the present day. Since we are dealing with human greed and fear, we can better understand the bull/bear odds in the present day by looking for differences between markets that should have been held (1994, 1998, 2004) and markets that should have been sold (2000).


The purpose of this exercise is not to imply that stocks and commodities should be blindly held in the current environment. Our intent is to show that (a) markets can recover after sleepless-night sell-offs, and (b) the 200-day moving average can help us better understand the market’s evolving risk-reward profile.

The chart below shows the S&P 500 as of the close on Friday, August 5, 2011. There is a high degree of fear and uncertainty reflected in the right side of the chart. In all the charts that follow, the S&P 500’s 200-day moving average is shown in blue. Notice in June 2011, stocks held near the 200-day moving average. Near point A-11 the slope of the 200-day has flattened out, but has not yet turned negative.

Without studying market history, you may believe a chart like the one above is extremely unique and will most certainly lead to a multi-year bear market in stocks. History tells us that ugly charts coupled with high levels of fear do not necessarily mean it is time to move to 100% cash.

The chart of the S&P 500 in 2004 below looks similar to the present day chart above. Like 2011, stocks held near the 200-day on the first pass in 2004 (below). Near point A-04 stocks dropped sharply below the 200-day moving average. Like 2011, the 200-day moving average in 2004 began to flatten out. Countless investors moved to 100% cash in 2004 as talk of a new bear market escalated.

Unfortunately, investors who sold everything in 2004 missed a big rally after the fear subsided. The low near point B-04 occurred at 1,060. The S&P 500 rallied 48% after many ran for the exits in 2004. The peak of 1,576 on the S&P 500 was not made until October 2007. In 2004, the slope of the S&P 500’s 200-day did tick down very briefly, but stocks never made a lower low relative to point B-04. When the slope of the 200-day turned back up in November 2004, it indicted that the risk-reward ratio for stocks had improved.

If you think the fear in today’s market is unique to bear markets, you probably were not investing in 1998. Like 2011, stocks held on their first pass at the 200-day moving average. Like 2011, the slope of the 200-day flattened out near point A-98. Like 2011, there was a very high level of fear and pessimism about the future near point B-98. Like 2004, in 1998 many investors couldn’t take it anymore and moved to 100% cash.

Like 2004, those who sold out in 1998 missed a big rally in stocks. The takeaway from the chart below is the 200-day never rolled over in a convincing manner in 1998. As of the close on August 5, 2011, the S&P 500’s 200-day moving average remained flat, similar to 2004 and 1998.

The year 2000 has come up in our screens as being technically similar to the present day. Unlike 1998, 2004, and 2011, the S&P 500 moved below its 200-day moving average eight times before peaking in September 2000. While the eight crosses of the 200-day do not compare well with the present day, notice the S&P 500 did hold up fairly well as long as the slope of the 200-day moving average remained positive or flat. The 200-day flattened out near point A-00 below indicating a deteriorating risk-reward profile for stocks.

The market above should have been sold. Notice in the chart below the 200-day moving average turned over in a bearish manner near point C-00, which was a red flag. After the 200-day moving average turned over, stocks made three lower lows as shown by L-1, L-2, and L-3. These lower lows were another red flag. It is possible that the market in 2011 will morph into something similar to the chart below. If it does, we will significantly increase our allocation to defensive assets, such as cash, gold, silver, and conservative bonds.

The most difficult case to manage through was 1994-1995. The chart of 1994 looks similar to 2011. Stocks held near the 200-day on the first pass. The slope of the 200-day moving average became flat near point A-94. Like 2011, prices dropped fast after breaking below the 200-day moving average.

The difficult part about 1994 was the slope of the 200-day moving average turned negative to the right of point A-94. The key difference between 1994, a market that should have been held, and 2000, a market that should have been sold, is stocks never made a lower low below point B-94 in 1994. Also in 2000, the slope of the 200-day moving average never ticked back up in a bullish manner like it did in early 1995 in the chart below.

How does all this help us? The market has deteriorated enough in 2011 to react in a defensive manner, as we have by increasing our exposure to cash, holding our bonds, and adding to our gold (GLD) and silver (SLV) positions. If we pay attention to the present day in the context of history, we should be able to decide prudently if further defensive action is needed. Our ultimate goal is to understand if the odds favor a new bear market or higher highs in asset prices. The similar markets from 1994, 1998, 2000, and 2004 can improve our odds of success in the days and weeks ahead.

By Chris Ciovacco
Ciovacco Capital Management

    Copyright (C) 2011 Ciovacco Capital Management, LLC All Rights Reserved.

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

    Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

    All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

    Chris Ciovacco Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

deegee
08 Aug 11, 17:38
recovery

The US may not technically be bankrupt but a lot of the people are,or close to it.Since the depression there has never been such a devaluing of the american family.In past recessions jobs were lost but the basics remained sound.The american dream was still alive.This time the whole infrastructure is falling apart led by the one thing americans value most,their houses,or at least the prospect of buying a home.That has always been the basis of personal security.It has been taken away leaving a fear in the pit of their stomachs,a black hole.Until that security is,at least on the horison of hope,there will be no recovery,and that is going to take years if not decades.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules