A Melman Minute
By: Leonard Melman
July 17, 2008
Yesterday provided market watchers with yet another
example of the "one-day turnaround" both in market psychology and market
performance. Growling 'bears' suddenly turned into elated 'bulls' and the major
market averages charged ahead with both the TSX and DJIA posting solid gains
while gold and oil plunged.
We hate to put somewhat of a damper on the happy patter now issuing from the
Wall and Bay Streets 'talking heads', but market history shows there is
absolutely nothing unusual about sudden rallies within declining markets. In
fact, one could say they were the norm.
Perhaps the finest lesson of this principle is demonstrated by the history of
the Dow Industrials within the period of the Great Depression. Most
non-fanatical market observers tend to recall the most intense period of the
collapse from the preceding bull market high of 384 in the "Dow", achieved in
September, 1929, to the ultimate low in mid-1932 of 40 as a straight-line move.
That simply was not the case.
While periods of miserably bleak news background predominated, there were
powerful bursts of buying as some news development or another set off rallies,
presumably based on the belief that "the worst was behind us." One look at the
following table, taken from our historic chart of the Dow (and therefore
containing estimated figures) shows not only the strength of those
counter-rallies, but also their inability to reverse the major trend until a
solid chart bottom was put in between June, 1932 and March, 1933, after which
the Industrials finally began a strong four-year rally into 1937.
MAJOR DECLINE COUNTER-RALLY
384-194 194-290
290-156 156-197
197-120 120-157
157-85 85-120
120-72 72-90
90-40
To complete the picture, the Dow then rallied up to 80, but on the subsequent
decline, selling stopped at a higher level than the preceding drop to 40 and
that was the signal that the terrifying decline appeared to have run its course.
The strength of these counter-rallies can also be proportionate to the severity
of the declines which preceded them and this point is well illustrated by the
fact that eight out of the ten largest one-day percentage GAINS in market
history (as measured by the Dow Industrials) were set between October 1929 and
June 1932.
All of this makes sense when two factors are taken into consideration. First,
many people have been burdened with an array of bad news and , by natural
instinct, eagerly await a change of background tone, such as we have just seen
by a decline in crude prices and some "not-as-bad-as-expected" banking news.
Therefore, they tend to pounce on any glimmer of true hope. Second, many
professionals who have 'shorted the market' have seen massive profits accumulate
during the previous decline and tend to rush to protect those profits by
covering their shorts when they see what looks like a powerful rally get going.
With that in mind, let's look at the past two years on the Dow Industrials
chart. As can be seen, the Dow reached a major top at 14,200 in the latter part
of 2007, featuring a massive peaks in June, 2007; October, 2007 and December
2007. From that point on, the picture has assumed a negative cast with the Dow
plunging to 11,500 by mid-January, 2008, rallying back up to near 13,000 in May
- and, lately, falling dramatically to below 11,000.
It can readily be seen that on the way down, the path has been interrupted by
several strong counter-rallies, but the downtrend remains intact and that is
where our attention is presently focused.
Markets this morning have been mixed, with the Dow up slightly near 8:30 AM PDT,
TSX moderately stronger, gold sharply higher with the price back above (all
quotes US$) $970 and silver once again above $19.00 per ounce. Base metals are
higher as well and major mining share averages have advanced moderately.
Crude Oil has rebounded by about $2.00 to near $136.50 and the U.S. Dollar is
slightly lower with the DX Index trading near 71.80 - less than a point above
its historic low.
REMINDER - Beginning late next week (following a mining
visit to Northern British Columbia) we will begin publishing our four-part
series under the "Melmania" portion of this site. Information coming out of
China is beginning to point to possible obstacles in their all-encompassing
economic growth strategy. Given China's importance to a multitude of resource
and financial markets worldwide, we believe an in-depth study of that nation in
the present time frame is well worthwhile.
◄ Previous Minute
Next Minute
►
