Wednesday, November 5, 2008

"The Largest Rallies Occur in Bear Markets"

"The Largest Rallies Occur in Bear Markets," is a phrase I'm sure many have heard before. And it is true. The notion that stocks rising by 10% a day is a "good thing" has been thoroughly discredited over and over in the last 100 years, yet the media continues to parrot this price action as a positive. Just one more reason to ignore our propagandist media.

Here is an article by Professor M.P. at Minyanville detailing the largest rallies of the 20th century.

The Top 10 Biggest Percentage Gains in the Dow Jones Industrial Average

March 15, 1933 - up 15.34%
The first trading day after the bank holiday on March 6th and after the passage of the Emergency Banking Act on March 9th; it “marked a turning point in expectations for economic recovery.”

October 6, 1931 - up 14.87%
Followed the October 5th announcement, by President Hoover, of a proposed conference with members of Congress on the country’s economic problems.

October 30, 1929 - up 12.34%
The day after Black Thursday. Per Laurence Stern of The World:

“After the stock market had come crashing down again in a veritable deluge of forced and hysterical liquidation, word sped through the financial district last evening that the largest banks in the city were prepared to exert their organized power this morning to prevent further disaster. Arrangements described as "fully adequate" were completed at a conference at the offices of JPMorgan at Broad and Wall Streets...

"Although no formal statement was issued, it was the consensus of those at the meeting that the worst of the liquidation is over and that a natural demand for investment stocks now available on the bargain counter should go far toward an immediate restoration of trading stability.”

September 21, 1932 - up 11.36%
The day after the Reconstruction Finance Corporation announced it was expanding its focus to include aid to farms.

October 21, 1987 - up 10.15%
The day after the market bottomed on the 20th during the 1987 crash, when circuit breakers on the CME and CBOE were triggered.

August 3, 1932 - up 9.52%
The day after Secretary of Commerce Robert Lamont submitted his resignation.

February 11, 1932 - up 9.47%
The day after Secretary of the Treasury Andew Mellon submitted his resignation.

November 14, 1929 - up 9.36%
The day after the failed re-test of the October crash. (Couldn’t otherwise identify a specific event contributing to the rally.)

December 18, 1931 - up 9.35%
The day after the US government announces it will provide financial assistance to the railroads.

Oct 13, 2008 saw an 11.5% gain in the S&P 500. Oct 28 saw a 10.8% gain in the same average, putting them right up in the top 5 largest advances of all time and squarely in the company of advances seen during the early years of the Great Depression.

Most analysts reject the notion that our current situation is anything like that of the 30s. The common argument is that our governments have taken far bolder steps than those of Hoover's or of R.B Bennett's, therefore a similar outcome is impossible.

Such arguments are historical revisionism at best. Blatant propaganda at worst. The actions taken at the time were revolutionary, just like today's actions.

No, this will not be "just like the Depression." No economic cycle is exactly like any other. But in terms of magnitude, it is apparent from a number of indications (economic indicators like home sales, retail sales, auto sales, consumer confidence, etc) that this is not just another cyclical recession, but rather a secular depression. Seeing massive rallies in the major indices is just another signal.

Healthy and growing markets do not perform like this. We have already seen a 20.7% rally off the lows of last week. Sure, the market could rally another 20%. But buyers at these levels are putting themselves in an extremely vulnerable position.

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