Studying Similar Sharp Declines & Their Bottoms  

The Principle of Understanding History & The Principle of Technical Analysis.  Written Tuesday, October 7th, 2008

OK, yesterday I heard one analyst, I believe it was Liz Ann Sounders, chief investment strategist for Charles Schwab say the recent sharp year-over-year (yoy) stock market decline is only rivaled by the year 1974 and two years back in the 1930s.  I could make a good guess which years in the 1930s those steep yoy declines came but I went back and checked anyway because those are the years along with their stock market bottoms that I want to start studying, their charts and their economic, financial and psychological backdrops as well.  All three years were big bad bear market years as yoy declines of -30% or more would have to be.  1974 was the year our last Papa Bear market ended, and was the second year of that bear market.  1931 was smack in the middle of that big Papa Bear (stocks bottomed May 1932 and in rallied the second half, preventing 1932 from making the list).  And 1937 was the year the five year, first bull market after the Papa Bear of 1929-1932 ran out of steam and the economy ran off the cliff and we had a short but very severe Mama Bear market.  (I distinguish Papa bear markets from Mama bear markets by their lengths, the 1937-1938 bear market lasting only one year.)  A first, brief cursory review of those big down years is as follows:

·         1974.  The total decline in the Dow came to -45.1% in just under two years.  The stock market’s bear market ending was immediately preceded by a most severe leg down in stock prices, losing -27% in less than two months from early August through October 4^th.  The ultimate bottom was characterized by the Dow Transports NOT making one last new low along with the Dow Industrials in early December.  Schwartz View:  Diverging in other words.

·         1931.  The total decline in the Dow came to -89% and took just under three years, September 1929 to July 1932.  1931 came in the middle of that horrific Papa Bear market so that’s dismaying for us today.  But, similar to the bottom in 1974, the 1932 bottom came after a grinding last leg down in stock prices.  From March through July 1932, we saw an inexorable day-after-day, four-month decline totaling -54%.  Whew!  Schwartz View:  Trading volume was the distinguishing characteristic of that market bottom, shrinking up noticeably.  

·         1937.  The total decline in the Dow came to -49% and took almost exactly one year.  The bulk of the 1937 Mama Bear market occurred primarily during a sudden market collapse from August through December and encompassed another extended, depressing, sharp down leg of -40%.  In October of this four-month leg down, trading volume spiked during a mini crash but that wasn’t the final bottom.  Schwartz View:  The bottom came on much reduced trading volume in March of the following year and prices didn’t really move up until volume again picked up, in about June.

SCHWARTZ SUMMING UP.  My first, quick gleanings from reviewing past market bottoms after the three most severe year-over-year declines in stock prices, like one we're in right now,  indicate we might look for anultimate market bottom to include:  (1) a sharp leg down just preceding the bottom, (2) a divergence between the Dow and the Dow trannies and/or (3) sharply lower trading volume for some weeks before the ultimate bottom.  Stay tuned for more to come while hanging tough.