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| Year-in-Review
(July 2000 - July 2001): Moving Forward |
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2000 - 2010 à
Repeat of 1961 - 1974:
The NASDAQ has moved up as much as 40% off of
its April lows, which may or may not have been
the bear market bottom. But what do we expect as
we go forward? Our expectation is that this
index won't hold much of its gains over the next
decade in either real or nominal terms. In order
to understand our reasoning we will examine the
bear market history since the turn of the 20th
century. [We will look at the DJIA and S&P
500 rather than the NASDAQ, in order to get
sufficient history, as the NASDAQ in its present
form is only 30 years old.]
Bear Market History:
There were 17 bear markets in the U.S. from
1900 to 1991, turning in an average decline of
39.8%. From 1900 - 1938 there were 8 with an
average decline of 48.8%. From 1938 - 1991 there
were 9 showing an average decline of 31.9%. The
bear markets with the larger declines began when
the price-earnings ratios were greater than 20.
The recovery time to reach the previous high
took longer in these cases than when the bear
markets began with much lower price-earnings
ratios. We feel the most relevant examples to
the current market are the series of bear
markets that began in 1929 and those that began
in 1961.
The bear market that began in 1929 was
initiated with the DJIA 's price-earnings ratio
(P/E) greater than 20, an inverted yield curve
and deflation. The one that began in 1961
started with a DJIA P/E greater than 20 and an
inverted yield curve, but inflation-stagflation.
Since the NASDAQ bear market that began March
10, 2000 had a P/E ratio greater than 20, an
inverted yield curve and inflation-stagflation,
we feel the present market resembles the
1961-1974 market.
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This series of three bear markets - 1961-1962;
1968-1970; 1973-1974 - can be treated as one
long bear market. The high for the DJIA (1961)
was 735, but fell to 536 in 1962; it increased
to 995 during the 1966-1968 period, only to fall
to 631 in 1970. Again, the DJIA increased to
about 1000 in 1973-only to fall to 577 in
November of 1974. That is, in 1974 the DJIA took
a hit which left it at a level lower than the
high of 1961 and at its bottom was only 41
points (7.6%) higher than its low of the 1961-62
bear market. Even when dividends are added the
result was a very small gain for the DJIA in
nominal terms and a great loss in real terms for
that 14-year period. Since the peak P/E's of the
current period were much higher than those of
the 1961-1974 period it is highly probable that
stocks, and particularly the NASDAQ as an
index,,,, will not be a very good investment
vehicle over the next 10-15 years.
What Is To Be Done Now?
If the above scenario is correct, what
strategy or strategies will perform best in the
coming years? In June 1987, prior to the
August-October crash of that year, Robert
Solomon (of Solomon Brothers) suggested that he
made a ton of money between 1962-1970 as the
averages went flat. In our opinion, the market
today offers the same kind of (an) environment.
That is, the markets will rise and fall, but a
buy and hold strategy applied to a NASDAQ type
index over the next 10-15 years has a low
probability of performing well. Therefore, the
stock trader will have a distinct advantage
moving forward. One must either select
securities very wisely or trade the indices with
facility. We shall apply both of these
approaches over the next several years.
·
Executive
Summary
· 2000
- 2001: Look Back
·
The
Market Moving Forward
· On
Technical Analysis and Trading
· Market
Calls Performance
·
Acknowledgements
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