Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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