Learn From The Past - Other Recessions

bear market rallyFinally, the four days of consecutive buying was snapped today as the Dow spent pretty much the whole day in the red. For most of the day, it was trading down between 90 and 130 points. However, once again the market "conveniently" rallied right before close, leaving the Dow to close just down 65 points. Although at this point it seems as though manipulation will always be found in this market, that is not the case. You can remember back just to fall of 2008 and earlier this year, due to the large amount of trading volume, manipulation was ineffective and not relative. However, PPT can have its way on low volume trading days, which is what we've mostly seen the past month or so. Eventually, more "forced selling" will have to occur, especially as we start to see the economic data continue to get worse. At that point, volume should not be an issue and once again manipulation will be minimal. Until then, it's always something to be aware of and something I factor into my trading.

In today's post I wanted to address the arguments I hear a lot, especially on CNBC, in which many believe that due to the recent slightly better data we have seen in certain economic sectors, we are nearing a bottom. Such a belief is a dangerous one to have, especially when studying bear markets of the past. Here are three quick reasons I'm not jumping on the bull train:

Tis The Season
Historically, the stock market has some of its best performing months in the spring. January and February usually suffer due to their close proximity to holiday months, in which people are usually all shopped out. However, as it begins to warm up, a new rejuvenation is usually brought to consumers, which gets them out shopping for the upcoming Summer season. All you have to do is look back at the history of the markets and see the usually green spring we see. So after such a devastating fall and late winter, a good Spring is no big surprise.

Help From Uncle Sam
There is no question that the government has been very active in attempting to prop up markets and bring back consumer confidence. Sure, publicly, we see the TARP funds, corporate bailouts, tax incentives, FASB accounting changes, Fed rate cuts, etc. However, there is much more "behind the scenes" in which the government can get involved. It is pretty evident that they've got money in the stock market, behind the scenes bailouts, and other "private practices" that never do hit headlines. As a result, we have seen TRILLIONS and TRILLIONS spent just these past few months in the attempt to bolster up confidence in the market.

As a result, the Treasuries and the dollar have taken a toll, but so far, they've accomplished much of their goal: To fabricate the market and economy in a way that makes investors confident again. The only problem with this is that, in most cases, it is unsustainable. Much of the goal was accomplished to get markets up to decent levels so that many companies and banks could do share offerings at somewhat reasonable stock prices to pay off debts and build up reserves, but this is only useful if we are at the upswing. That's a big IF.

So to see a minor slowing of negative data is expected when you consider the trillions which have been flushed into the economy in a matter of months. The big question is how it becomes sustainable.

Recessions of the Past
It is very common in past bear markets to see varying data throughout different quarters in the market. This was very common during the Great Depression. In fact, just shortly after the 1929 crash, certain economic indicators showed improvement, which in turn brought up the markets to a pretty significant rebound. However, worsening data later settled in as seasons changed, which caused the bear market to continue another two years and reach much worse levels. You better believe there were many at that time who thought the worst was over in the beginning of 1930. These same trends have been found in prior recessions, of course with much less emphasis. The point is, to assume that we are bottoming just from a few economic indicators we have seen a slight improvement in is silly. Especially when you consider that other very important economic conditions continue to get worse, like unemployment and new home sales. I mean how long can we afford to lose 500-700,000 jobs a month? It's important to learn from the past.

These and several other reasons are why I have chosen not to jump on the bull train. The rebound we have experienced is almost a perfect Fibonacci rebound, which in turn would suggest a new pullback. Even though we saw a slightly better PPI and CPI report last month, it still does not rule out the very real and likely possibility of a deflationary down spiral in the near term. We've just seen a big balloon in commodities and energy, which has been a big reason for the recent rallying. However, I think we could see a big pullback in both gold and oil.

So until we steer clear from this bobbling stage, I'm remaining very cautious with my current holdings. I still remain mostly in cash, but have some good short positions that I believe will do well for me here shortly. Tomorrow I will give an update of what exactly I am holding currently on the premium podcast (subscribe here). On the good side, my IRA has been doing very well (which if you haven't opened one, you may want to consider it with stocks at low levels, open a free one here: Get an E*TRADE IRA. No-fee, no minimums. Get 100 Commission-free Trades.). As I begin to see more trends come into the market, I will post it on here. Happy Trading.


  1. Jamie Kaye Says:

    I really enjoy reading your blog. This whole market is making me crazy and reading your blogs, kinda makes me more crazy, but in a good way. I wanna crush this whole optimistic outlook because I feel that it is going to crush our country and economy as we slowly are taking our eyes off of the ball. Tonight I even heard some talk about rolling back the stimulus, that it was not needed anymore? WTF? We are far from out of the woods and with the PPIP now falling into oblivion because mark-to-model is making the banks not want to rid those assets due to not having to take the write downs and wanting to wait it out, this whole thing is looking more and more like 1930. I am hopeful and want a recovery, but nothing has changed, only the gov't pumping and propping it up. More properties for sale and not selling, more job losses although not as bad as Dec. and Jan, but still bad, all the cutting of inventories is done, so what else can get done. When it begins to look worse I wanna know what bullets are left in the gov't arsenal. How will the public view that? I am scared of what will be coming. I am mostly in cash, but playing with some side cash. I will wait for it to fall and retest the lows of March. No one thought the rally would continue, so it did and is continuing. Now no one thinks we will retest those lows, so I think that is why retest and fall through them. I will continue to read your blogs daily. Thanks and keep up the good work!!