I've been following a potential S&P 500 breakout above a long-term congestion area around 1150. I'll update this chart periodically to see how this close encounter plays out. So far, so good.

For background on this topic, see this post.]]> 549cdb6fc3f8e61f5fbf6687d34689b5 http://dshort.com/articles/2010/bear-turns-to-bull.html March 17, 2010  updated each market day 

The S&P 500 closed the day up 0.58% to a new interim high 72.4% above the March 9, 2009 closing low, which is 25.5% below the peak in October 2007.

Click the second chart to review the previous rallies during the current market.

Here is a StockCharts.com snapshot showing the relationship of the S&P 500 to its 50- and 200-day simple moving averages.

Since inflation is a favorite topic on this website, I regularly update a set of charts to facilitate a comparison of the nominal and real declines. See also my logarithmic scale view of the "Four Bad Bears" comparison.

For charts of other bear market recoveries, see The Bear Bottoming Process.

For a better sense of how these declines figure into a larger historical context, here's a long-term view of secular bull and bear markets in the S&P Composite since 1871.

For a bit of international flavor, here's a chart series that includes the so-called L-shaped "recovery" of the Nikkei 225. I update these weekly.

These charts are not intended as a forecast but rather as a way to study the current market in relation to historic market cycles.]]> 2d70e6754528d770d95bb077b9271a76 http://dshort.com/articles/2010/road-to-recovery.html March 17, 2010  updated each market day 

This chart is an offshoot of my Four Bad Bears. It shifts the point of alignment from the pre-bear highs to the bear bottom in the Oil Crisis and Tech Crash, the first major low in the 1929 Dow, and the March 9th closing low for our current Financial Crisis.

As the chart illustrates, the S&P 500 lows in 1974 and 2002 marked the beginnings of sustained recoveries. The Dow low in 1929 failed 11 months later.

Here is the same chart adjusted for inflation.

For a more optimistic alternative view, suggested by an investment professional and visitor to this website, see this post.]]> 48974f82e94d7f55debbe302d8d00ccf http://dshort.com/articles/2010/market-musings-SPX-st-paddy-green.html March 17, 2010

In honor of St. Patrick, I wanted to show some green, and what better way than to repost a chart showing the S&P 500 with the 12-month simple moving average (SMA) percent above and below the buy/sell signal.

We've been in the green since July of last year, a welcome relief from the shocking abyss of red that lasted for 19 months beginning in December 2007.

Of course, if you followed this timing signal for an S&P 500 ETF (or anything remotely comparable), your portfolio today is a lot greener than it would have been otherwise.

Fingers crossed that the green continues!

Here's another Technical Tuesday analysis from Chris Kimble, our veteran analyst guy from Kansas.

The first chart is an overlay of the S&P 500 and two high-yield bond funds: Putnam High Yield (PHIGX) and Fidelity High Income (SPHIX). As Chris points out, the high-yield duo both declined in advance of the twin peaks in the index — much earlier for the first bubble.

Interestingly, both high-yield bond funds also lead the advance off the bottoms. For the Tech Bottom, the high-yields led the 2003 retest of the low. For the Financial Bubble, the high-yield funds bottomed out a good three months in advance of the 2009 index low.

As the "six pack" chart shows, high-yield funds have been on a tear and moved back above their 50-day exponential moving averages after a correction that began in January. If the trend continues, that may be bullish for stocks. But all six are in the vicinity of those January highs. It will be interesting to see if they can move higher.]]> 3e588597c22bef8d315019a6c235acd0 http://dshort.com/articles/2010/market-musings-SPX-1150-congestion.html March 16, 2010

I've been following a potential S&P 500 breakout above a long-term congestion area around 1150. I'll update this chart periodically to see how this close encounter plays out. So far, so good.

For background on this topic, see this post.]]> a4a5e3626dfbd0c126ce2b821c1507f6 http://dshort.com/articles/guest/Chris-Kimble-100316.html March 16, 2010  Analysis from Chris Kimble 

Yesterday I responded to an email from a reader who questioned the predictive value of technical analysis. Last night contributor Chris Kimble, a veteran technical analyst, emailed me some additional thoughts on the merits of TA:

In Kansas, farmers grow a decent amount of wheat. What is the one thing they know at the time of planting? They know when they will "harvest." Investors around the globe were given a 100%+ rally in the late 1990s and a 100% rally from 2003 to 2007. Why do some investors have little to show for these two massive rallies? No "plans to harvest."

Markets are risky. I view support and resistance as "Risk Management lines in the sand." As you can see from the support and resistance lines drawn on the Wilshire 5000, they aren't predictive in nature. No, they are tools to risk-management buy and sell lines. Both support lines below (1) if used as "harvesting tools" would have helped investors pocket some decent gains, regardless of opinions on valuations, dividend yields, etc. I love fundamentals, yet sometimes as this witty poster highlights, they have challenges as well.

Well said, Chris. I use moving averages for a similar risk-management purpose, which is why, without comment, I automatically added a 12-month simple moving average to this chart.]]> e135d7fa77903d300ae0ff07b6f456af http://dshort.com/articles/2010/PE10-real-vs-nominal.html March 16, 2010

Today's email brought a question I've received and privately replied to several times in the past regarding the P/E10 ratio in my monthly market valuation update. This time I'd like to share the question and illustrate the answer with a chart. First the question:

I don't understand why the P/E10 needs to be adjusted for inflation. Doesn't inflation in the price (numerator) cancel out inflation in the earnings (denominator)?

Actually it doesn't. That's because the nominal earnings during trailing 10-year periods of high inflation would give an elevated P/E10 value. The reverse is the case during deflationary trailing periods.

In this version of my monthly valuation chart I've added a nominal P/E10 and highlighted the nominal versus real P/E10 ratios in the callouts. Study this dual P/E10 chart in relation to this snapshot of historic inflation/deflation. Note, for example, that deflation makes the nominal P/E10 ratio at the 1932 bottom look even lower. In contrast, the inflation of the 1970s and early 1980s makes the nominal P/E10 ratio seem much higher at the 1982 bottom. To quantify this last example: The nominal P/E10 in 1982 is a stunning 52% higher than the real P/E10, thus obscuring the incredible value of the 1982 US market.

Hope this helps clarify!]]> 80f33a37f467cda904fbe73a804ecaa7 http://dshort.com/articles/2010/market-musings-0315-close.html March 15, 2010

I had a delightful email exchange over the weekend with Bob in MA. Here are some excerpts:

I've enjoyed your blog and your straight-forward look at valuations, dividends, etc. But I really can't understand the worth of the technical analysis (TA) charts. Each is a series of lines, and the analysis seems to consist of a prediction that prices will either go up or down. For instance, I looked for the post where "Serge anticipated the S&P 500 pullback that began in January", but what I found were fairly vague pronouncements, and questions about what might happen.

In the latest graph, he posits that IF some resistance lines are broken a POSSIBLE uptrend may ensue. Well, yeah. And if it rains here tomorrow, the S&P500 may rise next week... but might not.

The basic problem is that these TA people never seem to say anything that could be shown to be demonstrably wrong in the future, no matter what happens. So how can they ever be right?

I've described TA to my wife as being like horoscopes, with millions of people are reading the same horoscope and many following its advice, and when they do, it sometimes becomes self-fulfilling. But the equivocal nature of most TA makes it seem a little silly: we're at an inflection point, and the market will go up — if it doesn't go down.

I like to include some technical analysis on dshort.com for a couple of reasons:

1) Strict mathematical indicators, for example, moving averages, can show that the market is susceptible to trends of various durations — up, down, sideways. Technical analysis offers some strategies for making conjectures about continuations and reversals.

2) There's a significant behavioral factor in markets and the economy — irrational exuberance, dismal despair, and everything in between. Technical analysis, with its trend lines of support and resistance, may provide some clues about the underlying market psychology.

As for the predictive power of TA? Not exactly a crystal ball. Same for fundamental analysis. However, a long-term trend, horizontal consolidation, or even an inverted head-and-shoulders formation is probably a better indicator of next week's S&P 500 than an inch of rain in Massachusetts tomorrow.

Ultimately technical analysis, like its fundamental counterpart, is a search for evidence to make educated guesses.

Actually, there's a third reason I like to post some technical charts: Sheer entertainment value. I look at a market bumping and grinding against a couple of trend lines, and I love the suspense. Take that 1150 resistance in the chart linked above. Will it break out? Break down? Or consolidate sideways?

For some of us, these charts are almost as much fun as NCAA basketball!]]> 267b3f3bf0143744ec0a823a12e75bec http://dshort.com/articles/2010/market-musings-0315.html March 15, 2010  pre-market open 

As this monthly chart shows, 1150 (give or take a few points) has been an interesting congestion area for the S&P 500 over the last twelve years. During the summer of 1998 the index briefly rose above this level until the Asian Financial Crisis sent Wall Street diving for cover. The index lost 22.4% from the intraday high in July to the intraday low in October. But the setback was short lived, and the market continued its race to the 2000 peak.

The Tech Bubble finally popped in March 2000. A year later 1150 was the approximate support for a brief rally that ended in the fall of 2001. Over the next several months 1150 served as resistance until the market finally keeled over and bottomed out in 2002 with a successful retest of the low in the spring of 2003.

The rally that followed stalled in the first half of 2004. The 1150 area was a fairly stubborn resistance level until the uptrend resumed in November. In 2005 the 1150 level turned into support during the spring selloff. The index ultimately bounced off this support to an all-time nominal high in October 2007. But the decline that followed morphed into the stunning Financial Crisis of 2008. The 1150 level was a brief blur on the way down to the March 9 2009 closing low of 676.53.

Flash forward to 2010. It now appears that the 1150 area is once again becoming a point of congestion (see the weekly inset on the chart). The S&P 500 hit 1150.23 on July 19th and then went into an 8.1% correction. Last Thursday it squeaked to new interim high of 1150.24 (wow!) and finished the week at 1149.99. Has 1150 — give or take a few points — resumed its resistance persona?

Based on fundamentals, such as the cyclical P/E ratio, today's market overvalued, and we still haven't had a classic 10% correction since the 70% rise from the 2009 low a year ago (see chart). Resistance around the current level would not be surprising.

For this market watcher, the S&P 500 certainly has an air of suspense. A pullback from these levels seems reasonable. But rationality is often not a dominant factor in market behavior.]]> a0847fe0533748e8c74d7083c7b0896b http://dshort.com/articles/2010/mega-bear-2000.html March 14, 2010  weekend update 

It's time again for the weekend update of our "Real" Mega-Bears, an inflation-adjusted overlay of three secular bear markets. It aligns the current S&P 500 from the top of the Tech Bubble in March 2000, the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.

This series is consistent with my preference for real (inflation-adjusted) analysis of long-term market behavior. The nominal all-time high in the index occurred in October 2007, but when we adjust for inflation, the "real" all-time high for the S&P 500 occurred in March 2000.

This chart series now includes a nominal version to help clarify the illusion of market performance created by inflation.

For those who prefer the overlay aligned with the 2007 S&P 500 peak, here is the nominal Mega-Bear Quartet charts and commentary.]]> a04d41476850f26a1731457b06b2f76e http://dshort.com/articles/guest/Serge-Perreault-10-03-12.html March 12, 2010  Analysis from Serge Perreault 

Here's the latest in a series of updates from Serge Perreault, a Chartered Accountant and market technician located near Montreal, Canada. Serge anticipated the S&P 500 pullback that began in January, and he has nicely annotated the 8.1% decline and recovery in a series of weekly updates: Jan 19, Jan 24, Jan 31, Feb 5, Feb 12, Feb 19, Feb 27, and Mar 06.

The S&P 500 closed the week up 1% and pierced downtrend resistance dating from the market peak in October 2007. Serge's latest chart shows the S&P 500 now bumping into sideways resistance for the index price, the rate of change, and the relative strength index (labeled A, B and C on the chart). For the S&P 500 price, that sideways line is around 1150. The interim high of 1150.23 on January 19th yielded to a new interim high on March 11th of 1150.24. The index closed the week at 1149.99 after rising to a new interim intraday high of 1153.41.

Click the chart for a close-up view and Serge's annotations.

• ROC (Price Rate of Change)
• RSI (Relative Strength Index)

Top is a 5-minute chart of the S&P 500; below is a daily view. Did anyone really expect the index to close the week above the 1150 resistance?

Perhaps we'll have better luck next week.

Or maybe we're forming a double top. We still haven't had a 10% correction since the 2009 low a year ago, as this chart illustrates.]]> bc4b49129614d703691bd4d63ef65e55 http://dshort.com/articles/2010/chart-trivia-0312.html March 12, 2010

From time to time I get emails asking for a nominal version of one of my inflation-adjusted charts of the S&P Composite. I usually reply that a nominal chart over many decades with dramatic changes in inflation simply wouldn't make any sense, much less be useful.

This morning's email brought a request from an investment professional in Montréal for a nominal version of my monthly market valuation update featuring the S&P Composite and the P/E10, the top chart.

Well, if a picture is worth a thousand words, here's my 1000-word essay on why I adjust for inflation. And I'm tossing in a bonus 1000 words on why I use a logarithmic scale for the vertical axis (another common question I'm asked).

1. The top chart is real, which means it's adjusted for inflation. The vertical axis is on a logarithmic scale, which means that a 100% gain from a price of 115 (say 1980 to 1986) will have the same vertical move as a 100% increase when the market is at 1150 (don't we wish!).
   
   
2. The second chart is nominal. This means, for example, that the stunning inflation during the 70s and early 80s (at times in double digits) disguises losses and gives the illusion of gains. And the horrible deflation of the Great Depression makes the chart look even worse.
   
   
3. The third chart, also nominal, uses a linear vertical axis scale. It gives the illusion that the market was flat for 80 years, and then sometime after WWII, it accelerated into an incredible pair of bubbles. Well, maybe there is a tiny bit of truth in this goofy chart.

My post yesterday on Shrinking Dividends prompted an interesting email from Brian in Utah, who is working on his Ph.D. in economics. He writes:

My thought was that during the period you cover, the cost of capital has presumably dropped significantly as improvements in our financial structure/institutions have reduced risk. When I think of substitutes to equity, I think of bonds or bank financing.

So, the model I have in mind is something like total cost of equity financing (which I guess you'd figure out with a combination of P/E and dividend rates) versus total cost of debt financing. Do they follow a similar path over time?

Now, this could all be a silly exercise as equity and bond markets didn't have the benefit of modern financial pricing theory back then and certainly were more subject to variations in credit booms and busts, but the first question when I read your article was "hmm, was that a systemic thing in terms of the overall riskiness and hence price of capital over time, or is there something else going on?" If it is systemic, then price/yield of alternative sources of capital would show the same thing, as well as vindicate the story that as our financial system has developed, it has reduced risk.

Then there's the question of was the investment riskier in 1900s or has our financial/accounting/regulatory system just improved information. Or were the robber barons just setting the dividends as their way to get paid (i.e., changes in corporate governance). Lots of possible stories, including classical political economy.

This could all be stuff just relevant to academics and not so relevant to your readers, but sometimes coming up with new ideas is difficult, and I very much enjoy your blog and wanted to try to give back a bit.

My explanation for the decline in dividends is based on demographics and tax innovation traceable to the early 1980s. The Boomers were just entering their higher income years and the 401(k) plan was introduced in 1980. The following year the Economic Recovery Tax Act permitted all employees, in addition to those not covered by an employee retirement plan, to contribute to an IRA. The result was the massive growth of a new investor class with a limited understanding of markets and risk. The bulge of Boomers became a windfall for Wall Street (the oldest having just turned 35 in 1981).

The popularity of tax-deferred savings vehicles reduced the appeal of dividend income. The goal of retirement savings is total return — to grow the nest egg. Thus, the distinction between dividend yield and price appreciation quickly lost relevance. New companies saw little need to pay dividends. Many existing companies reduced their dividends and redirected those earnings to corporate growth (not to mention executive compensation).

Perhaps dividends will someday reemerge as a mainstay of investing. The one certainty is this: it won't happen overnight. But if the flight from equities in 2008 and early 2009 resumes, publicly traded companies may eventually rediscover the power of dividends to coax a risk-adverse generation back to the markets.]]> e852b9d003675d8a75614a3c39c83623 http://dshort.com/articles/2010/market-musings-0311.html March 11, 2010

More charts today from market technician Chris Kimble. The first chart is a simple trend line on the Rydex S&P Equal Weight ETF (RSP), which is breaking above two resistance lines on its second attempt this year. One is the down trend since the 2007 high and the other is a price that has alternated between support and resistance since the summer of 2005. Interesting and rather optimistic, but I doubt Chris wants us to take the length of that directional arrow literally.

The second chart is far more complex, with references to Fibonacci patterns (a Fibonacci expansion, no less!). And it's probably more controversial as well, especially for you gold bugs. Chris shows that gold is dancing on dizzy support (that nearly vertical red line). Of course, this is a 30-year chart, so don't look for an overnight reversal. That said, here's a gold forecast (should I say bold forecast?) from Dennis Gartman, courtesy of BusinessInsider.com.

But back to the simpler stuff. The third chart features the outperformance of the equal weight RSP (top chart) over a capitalization weighted ETF, iShares S&P 500 Index (IVV), since the index low a year ago. I don't want to stir up debate about cap-weighted versus equal weighting. There are compelling arguments on both sides. But over the past year, the equal weighters have a comfortable lead.]]> a51eb137fa335e53b980c4c40702ac40 http://dshort.com/articles/2010/shrinking-dividend-difference.html March 11, 2010

Earlier this week I've looked long-term (secular) market trends, focusing on duration of these patterns, and I've applied some regression trend lines to them. Today we'll look at the annualized returns for these epic market cycles and tease out the contribution of dividends to the overall gain/loss.

Let's begin with a look at the top chart, which is my monthly update of the S&P Composite and its dividend yield since 1871. As we can readily see, dividends have been shrinking over the past few decades, for reasons I mention in the update.

The second chart highlights the secular bull and bear markets since 1877. Obviously I'm ignoring individual 20% declines, the classic definition of a cyclical bear market, to keep our focus on the big picture. For example, the "Black Monday" the Crash of 1987, so stunning at the time, was little more than a nasty pothole on the steep climb from the 1982 bottom to the top of the Tech Bubble.

The Dividend Difference
So let's do some simple math on our table of annualized real returns for the secular trends in the second chart. The highlighted column shows the contribution of dividends by subtracting the annualized returns ex dividends from the annualized return with dividends included. The last column shows the percent change in the dividend yield from the previous trend.



The dividend return during the first cycle was right at 5% (4.99% in the table). The 14-year bear market from 1906 to the end of 1020 actually dividends increase by 8.4% (5.41% divided by 4.99% minus 1). The Roaring Twenties saw the dividends increase by 22.4%. During the Great Depression, the dividend yield fell slightly, but it still averaged above 5% for those twenty nasty years. But the decline in dividends continued. And during the last secular bear, they've been cut in half from the previous bull market.

The old strategy of living off dividends clearly isn't as feasible today as it was during previous secular trends.

As I've pointed out previously, even though our data covers a timeframe of nearly 140 years, there have been too few of these mega-cycles to make meaningful generalizations. Prior to the current bear, the shortest was the 14-year 1968-1982 bear. If last year was truly the bottom of the bear, it will take the record for brevity.]]> d3dae1e393283ff392022e1035da318f http://dshort.com/rij/2010-03-10.html March 10, 2010

The latest weekly issue of the Retirement Income Journal is now available, and this week's issue is especially interesting:

• The cover story asks the intriguing question, Black Swan or Black Turkey? We've all heard about black swans, those improbable catastrophes that defy prediction. But we've had no shortage of black turkeys — events that are entirely consistent with past data but that no one thought would happen. The financial crisis was but one of nearly a dozen such episodes over that past century.
  
  
• Next up The Joy of Illiquidity takes an unintuitive look at the benefits of investing in illiquid assets. This article reports on the a presentation by legendary financial wizard Robert Ibbotson suggesting the idea that illiquidity, either in stocks or in bonds, should be viewed as an investment style distinct from capitalization, value/growth, maturity or credit risk. This article includes the first reference I've seen to the illiquidity discount and the liquidity premium.
  
  
• My favorite article in this week's issue has a reassuring title: If You're Human, You Have Capital. In contrast to financial capital, human capital consists of "the present value of future earnings, the present value of future savings, and even the present value of Social Security and anticipated pensions." Your human capital changes over time, and it should definitely be a factor in your investment strategy.

For a free 30-day trial, visit the subscription page and use dshort as your coupon code.]]> ab0d46515d2ea1462fe288d810e0ede4 http://dshort.com/articles/2010/SP-Composite-earnings-growth.html March 10, 2010

Here are two new charts illustrating the growth of earnings over time. The underlying concept was suggested by Arto Nissinen, an investment advisor at Osuuspankki, one of the major banks in Finland.

The charts illustrate the relationship between the stock market, adjusted for inflation, and the real wealth created by companies in the form of earnings. Over the past year I've featured a monthly update of market valuation with a focus on the P/E ratio itself. These charts essentially use the average trailing-year and trailing 10-year P/E ratios to provide a greater focus on the growth of earnings with the more volatile market price hovering around those earnings.

First Chart. The blue bars in this chart show the real (inflation-adjusted) annualized earnings of the S&P Composite for the past 138 years. I've multiplied the values by 15.5, the average P/E ratio over the 138-year history, to align the two data series for a more useful overlay. The red line (inflation-adjusted price) shows how the market fluctuates around this real value. We can also see the occasional volatility of earnings at major economic inflection points: the earnings declines in 1894, the multi-year dips that started in 1916 and 1929, and the more recent bad years in 1991, 2001, and the earnings cliff dive in 2008, which included the only quarter of negative returns in this 138 year series.

Second Chart. Here the blue bars are the rolling averages of 10-year trailing returns multiplied by 16.3, the average P/E10 over this extended time frame. Now the long-term earnings growth becomes clearer against the more volatile annual price of the stock market.

Thanks, Arto, for the suggestion!

Incidentally, Arto classifies people according to three psychological investment profiles: Wealth Growers, Wealth Preservers, and Money-Amount Preservers. See below for his fascinating profile of the three types. Arto endeavors to educate Wealth Preservers who misguidedly think that Money-Amount Preserving is the best way to preserve wealth.

1. Wealth Growers
   Want: To grow wealth in the long term
   Accept: Strong fluctuations OR spend a lot of time with their investments
   Motto: "Fortune favors the bold (even statistically)"
   Example Solutions: 100% buy and hold global stock weight OR trading
   
   
2. Wealth Preservers
   Want: Primarily to preserve the wealth in the long term
   Accept: Moderate fluctuations
   Motto: "The golden middle way always works"
   Example Solutions: 50/50 wealth management OR Portfolio of 40% global stocks, 40% Euro fixed-income, 20% EMD local currency, no market timing at all, no activity requirement.
   
   
3. Money-Amount Preservers
   Want: The feeling of security that comes from seeing the Euros in the account
   Accept: Greatest risk of long-term decline in wealth
   Motto: "I get a feeling of security from the solution that I am used to"
   Example Solution: Renewing bank-deposits (they are government-backed in Finland)
   
   Note: EMD = emerging market debt

Here's a brief email from market technician Chris Kimble accompanied by his latest chart of the interest rate on the 13-week T-Bill. He writes:

This is a first since March of 2004, a break above the 200-day SMA. T-Bill rates fell BELOW ZERO at the height of the credit crisis.

Could this upside rise in T-Bill rates be a sign of confidence coming back?]]> cb75f478c8edd8ef396f84216225a09b http://dshort.com/articles/guest/Chris-Kimble-100309.html March 9, 2010  Analysis from Chris Kimble 

Yesterday CNBC featured a Good News article that had some cheerful things to say about the dollar:

Now that stocks and the dollar are moving in tandem again, it could be a signal for investors to put more money into US assets.

For much of the 2009 rally off the March lows the two entities had been in reverse lockstep. When the dollar would fall, stocks would rise and vice versa....

But with some upward trends in the economy and the likelihood that the Federal Reserve in the coming months will begin implementing policies to boost the dollar, the two have risen together this year. Analysts see the trend as less a dollar play and more a recovery move, and as a return to normal after the inverse correlation between the stocks and US currency. Jeff Cox, Staff Writer

Let's put this optimism in a larger context, say a decade or two, courtesy of Chris Kimble, a 30-year+ market technician and student of Sir John Templeton, who hails from outside of Kansas City, Kansas.

With his trusty Metastock software, Chris has given us a fascinating overlay of the US Dollar Index and the S&P 500 since 2000 (top chart). Indeed the correlation between the two has often been inverse — very much so over the past two years. As the CNBC article points out, the two have approximately tracked each other for the past two months. Is this synchronization really significant in this on-and-off relationship?

Let's look at another factor. Note the line at 80, a level that, give or take a point or two, has served as support during the 1990s (second chart). It offered support again at the end of 2004, and the dollar rallied for the better part of a year before the onset of another decline. The dollar finally dropped below 80 in September 2007, only a few weeks before the US market peaked.

After bottoming out in the early months of 2008, the dollar has played both sides, with 80 alternating between support and resistance. We're hovering there again — this time against a backdrop of several markets colliding with key trend lines, as this set of four key indexes illustrates.

Today is one-year the anniversary of the S&P 500 recovery following its ominous 666 intraday low on March 9th 2009. What comes next? Will the dollar and the market turn resistance into support and rally higher? Take a breather? Or consolidate sideways? Only time will tell. But the proximity of these trend lines makes for some technical excitement.]]> 32ff5282fdfe176d994b1a03b21e1bcf http://dshort.com/articles/2010/secular-bull-bear-regression-trend-lines.html March 8, 2010

Luca Varani, a biophysicist from Switzerland, emailed me with some interesting comments about the regression trend lines in this commentary on historic market price and dividends. He writes:

I have a hard time believing the post 1982 regression line. I believe that the similar trend lines through the 20s and 60s do make a strong point. It is equally difficult, however, for me to believe that everything has been the same for 139 years. After all you are using an arbitrary start point (yes, I know it's the earliest, but still arbitrary); for instance, fix your initial measure at the bottom in 1920 and, I suspect, you will have a different trendline to compare with.

First, a quick note on the regression trend lines in my charts. Since I use a logarithmic y axis for the market price, the Excel-drawn regressions are of the exponential variety. The lines essentially bisect the monthly values using the least-squares method so that the total distance of the data points above the line equals the total distance below. The regression, then, is sort of a hypothetical equilibrium, but it by no means implies that everything has been the same for the past 139 years. On the contrary, the market rarely hovers around the long-term trend. My main point in the earlier commentary was to suggest that the 1982 bull market was not the start of a new economic order but a reversible trend similar to historic market cycles.

The two thumbnail charts (click for larger versions) have regressions drawn through the secular bull and bear markets in the S&P Composite over the past 139 years. For the mathematically inclined, I've included the regression equations and R-squared. To calculate the annualized slope of the regression trend, I've multiplied the coefficient highlighted in color (red or blue) by 12 (monthly data) and formatted as a percent.

The table below combines the data from the charts. I've also added a more conventional measure of performance, annualized returns, with and without dividends reinvested for each of the secular periods. For these numbers I used the fabulous tool on the Political Calculations website (click the link and scroll down).

For each trend, the closer R-squared is to 1.0, the better the fit. For example the bull regressions for the Roaring Twenties, the 1949 "baby boom" bull and the 1882 "adult boomer" bull are close fits to the regression. In contrast, the bear market regressions are relatively poor fits, which is not surprising in light of the much higher volatility during secular declines (see this table). Thus, the extreme volatility of the Great Depression gives us a very low R-squared. Had I plotted the regression through the 32-month crash of 1929, it would probably have been closer to 1.0. The regression since 2000 has an even lower R-squared — not surprising given the back to-back cyclical bears in which the S&P 500 experienced nominal declines of 49.2% and 56.8% in less than nine years. The accompanying table also documents the secular annualized returns, with and without dividends — a topic I'll address in more detail later this week.

As I've pointed out before, even though our data stretches back nearly 140 years, there have been too few of these mega-cycles to make firm conclusions or reliable forecasts. But by drawing a regression through the data and one for each of the major bulls and bears, we get an inkling of the potential magnitude, duration and frequency of these secular trends.]]> 7f82d7e4129d97bc7a34345422343464 http://dshort.com/articles/2010/secular-time-frames.html March 7, 2010

Paul Hanly from Sydney Australia emailed me about the time frames in this monthly update on market valuation. He writes:

It seems that the cycle has been roughly 12 to 20 years (plus or minus 3 years), although there can be violent sub-cycles (e.g., 1930-1950) where the lowest low was actually 1932 rather than 1950. But the tops were in a downtrend.

Here's a new chart with the duration of those secular trends documented. The chart is based on the S&P Composite monthly averages of daily closes, so the time frames will vary slightly from the peaks and troughs on a daily chart. For example the 2000 daily closing high was on March 24th, but the monthly high (average of daily closes) occurred in August.

The accompanying table documents the secular annualized returns, with and without dividends — a topic I'll address in more detail later this week.

Note that there are two entries for the 2000 bear — the first with the March 2009 low and the second from the 2000 peak to the present. The question, of course, is whether the 2009 low was a secular bottom, in which case we're a full year into the new bull market. Or is the real bottom yet to come?

Even though our data covers a timeframe of nearly 140 years, there have been too few of these mega-cycles to make meaningful generalizations. Prior to the current bear, the shortest was the 14-year 1968-1982 bear. If last year was truly the bottom of the bear, it will take the record for brevity.]]> 67f661f5d6ed89f6b8bfab02d2adadfc http://dshort.com/articles/guest/Serge-Perreault-10-03-06.html March 6, 2010  Analysis from Serge Perreault 

Here's the latest in a series of updates from Serge Perreault, a Chartered Accountant and market technician located near Montreal, Canada. Serge anticipated the S&P 500 pullback that began in January, and he has nicely annotated the 8.1% decline and apparent recovery in a series of weekly updates: Jan 19, Jan 19, Jan 24, Jan 31, Feb 5, Feb 12, Feb 19, and Feb 27.

The S&P 500 closed the week up 3.1% and is positioned on downtrend resistance dating from the market peak in October 2007. Serge's latest chart adds sideways resistance lines for the index price, the rate of change, and the relative strength index (labeled A, B and C on the chart). For the S&P 500 price, that sideways line is around 1150.23, the interim high on January 19th.

Click the chart for a close-up view and Serge's annotations.

• ROC (Price Rate of Change)
• RSI (Relative Strength Index)

Last September I received an email from Rebecca Mitchell, an Investment Analyst in the UK with an irresistible suggestion. Here it is again, with updates to my charts and commentary.

Rebecca: I was looking at your Short History of Stock Dividends. I like the chart, but was wondering if it would be possible to provide an updated one with two different exponential regression trend lines, one for each period (1870-1982, and 1982-present) to match the two averages for the dividend yield?

If one is to think of the focus on dividend yields as having shifted, the focus on price might also have shifted!

Click the first chart to see a larger version incorporating Rebecca's suggestion. The intersection of the two regression slopes does generally coincide with the decline in dividend yield. As I suggest in my monthly dividend update, this change largely resulted from a convergence of demographics and tax policy — the Boomers looking for growth, not income, and the advent of tax-deferred savings plans, which further blurred the distinction between price appreciation and dividend yield.

This chart with the two regressions reminds me of this optimistic chart published a couple of years ago by Jeremy Siegel. Siegel was focused on real operating earnings per share, a different but related topic. He used a regression from the early 1980s to support a bullish market forecast. Along the way he observes that "Finance theory predicts, and historical data confirms, that if a firm pays a lower proportion of its earnings as dividends, then these unpaid earnings must be used to either repurchase shares, lower debt, or invest in capital."

Unfortunately, investors are now beginning to understand that this redirection of earnings from the investor's pocket to the corporate coffer was a slow-motion exercise in wealth destruction. Price growth was partially offset by the decline in dividend yields. But when price growth reversed, dividend yields were far less accommodating than they were during the Great Depression.

In my view, as illustrated in the second chart, a regression trend line through the market from the early eighties to the 2000 peak merely highlights a reversible secular trend comparable to regressions through the 1920s and from 1949 to 1966.

We're now well into the post 2000 cycle, with many investors hopeful, if not confident, that the March 2009 low was the beginning of a new secular bull market. Time will tell.]]> 7e6c73391fb0b5afc2883bc9eb48df7a http://dshort.com/articles/unemployment.html March 5, 2010  monthly update 

The monthly unemployment rate for February remained steady at 9.7% — the same as January. The peak for the current cycle was 10.2% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.

Unemployment is usually a lagging indicator that moves inversely with equity prices (see chart). Note the increasing peaks in unemployment in 1971, 1975 and 1982. The inverse pattern becomes clearer when viewed against real (inflation-adjusted) S&P Composite, with its successively lower bear market bottoms. The mirror relationship seems to be repeating itself with the current and previous bear markets.

The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. This measure gives an alternate perspective on the relative severity of economic conditions.

Incidentally, I'm now showing the lastest recession as having ended in June 2009, following the lead of the Federal Reserve Bank of St. Louis. The "official" end will be a rear-view mirror call by the National Bureau of Economic Research (NBER).

The third chart is one of my favorites from CalculatedRisk. It shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

Here is a link to the Employment Situation Summary released this morning by the Bureau of Labor Statistics.

The start date of 1948 was determined by the earliest monthly unemployment figures collected by the Bureau of Labor Statistics. The best source for the historic data is the Federal Reserve Bank of St. Louis.

The new issue of the Rule Your Retirement newsletter is now available.

• The latest Perfect Your Portfolio feature article gives a succinct rationale for diversification — what it really means and how you can accurately measure the diversification in your portfolio.
  
  
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