Bear Markets Seduce Investors

One of the astute comments recently from Paul Desmond of Lowry’s was that "Bear markets seduce investors to keep buying stocks."

Most investors do not study market history, but if they did, they would learn that the financial wreckage of the great crash of 1929 was not from that year, but rather, the bottom fishing in 1931 and 1932 and 1933. Bottom fishing is the killer.

Consider this discussion of similar bottom fishing, only this time, in a specific sector: Financials:

The credit crunch, despite the strenuous exertions of Bernanke & Co, shows little sign of easing, much less ending. Yet, financial shares have risen from the grave and are enjoying a dandy whirl. As Stephanie Pomboy, the perspicacious proprietor of MacroMavens, points out, this pop amid dauntingly ugly corporate reports by the banks and the rest of the financial gang is something we’ve seen before, and often.

"Since the wheels first started falling off last summer," she relates, "the financials have posted no fewer than 12 rallies of 5% or more…. It bears note that none of these stints, separate or combined, have precluded the financial sector from shedding 28% over the stretch."

Maybe 13 will prove the lucky number. Stephanie, though, sounds more than a bit skeptical, and so are we. At some point, we suspect, investors are going to sober up and stop popping the cork to celebrate the latest lender to take a multibillion-dollar bath.

Amazing — 12 rallies of 5%+, and the sector is down 28% from when the Fed began cutting.

S&P500 Financial Sector

Spx_500_fins_5_rallies

Source:
Great Expectations
ALAN ABELSON
MONDAY, APRIL 28, 2008
UP AND DOWN WALL STREET 
http://online.barrons.com/article/SB120916362804146087.html

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What's been said:

Discussions found on the web:
  1. Marcus Aurelius commented on Apr 29

    Irrational exuberance always leads to big losses.

    Always.

  2. bonghiteric commented on Apr 29

    There isn’t a fundamental reason to be purchasing the financials now. The dividends aren’t secure and earnings power has waned. Senior managements didn’t know the value of a lot of their structured assets nine months ago and I’m extremely skeptical that they’ve tweaked their models so that they can adequately reserve now and into the future.

  3. Vermont Trader commented on Apr 29

    Here we are at major resistance but the news seems to get worse every day.

    What can’t stay up must go down.

    Looking forward to CFC this morning.

  4. cinefoz commented on Apr 29

    On one hand, studying history is not especially reliable because people like to imagine patterns when none actually exist. History is interesting if it is accompanied by proper analysis. For example, low rates and easy credit create easy money which begets inflation and asset bubbles. Or high prices for necessities crowd out discretionary income, causing recessions. Or profits created by dollar value imbalances are really just the first sweet whiffs of massive inflation.

    Lazy people see repeating patterns in the form of graphs and imagine like causes. Occasionally, technical analysis properly graphs the summarized actions of large groups of people in a way that offers very short term but erratic suggestions about behaviors. But these entrails need to be tempered by proper education. Most technical analysis is pure shit intended for the gullible.

    The dumb money will believe the ‘experts’, who often appear to believe their own sales pitches. Personally, I love the gullible, for they are the ones who buy from me when I see a top approaching. Morally, I feel the need to provide education in the form of vanity postings such as this one. Thus, the fool who is determined to be parted from his money can’t blame me for his bad timing.

  5. cinefoz commented on Apr 29

    God, I hope the FOMC does something unexpected, such as the right thing. I really want to, metaphorically speaking, see the Fed slap the smugness off the faces of the pundits who think they are the tail wagging the dog. Idiots such as the one on CNBC at this moment, Laurence Meyers, really need leave the ivory tower. If the FOMC actually listens to these halfwits tomorrow and lowers rates, then they will rightly take title to the ‘Most Incompetent Fed Ever’ from Alan Greenspan and his entourage.

  6. stuart commented on Apr 29

    Here’s an astute observation I picked up.

    This is about as discouraging as it gets. I use to believe in the basic integrity of our system. Yea, there were always a few bad apples, but the system as a whole was on the square.

    Now I see that the system is corrupt and criminal. Including all the regulators from the FED, SEC, ratings agencies, the bankers, the brokers, the GSEs, the auditors and the politicians.

    Our financial system has turned into a massive ENRON scheme. And it is being engineered and enabled by those institutions and powers that oversee and regulate the system.

    Ken Lahay went to jail for far less than the fraud and deceit that is going on now.

  7. Ironman commented on Apr 29

    Most investors do not study market history, but if they did, they would learn that the financial wreckage of the great crash of 1929 was not from that year, but rather, the bottom fishing in 1932 and 1933.

    This is only half correct, Barry. The decline in stock market values that began with the Great Crash of October 1929 reached bottom in June 1932. However, the year-long period running from July 1932 through July 1933 is the single best year for stocks on record, providing a real return to investors of 143.5%.

    If you were to pick the worst single month-long period in stock market history, going from March 1932 to April 1932 would be it, although the #2 and #3 worst month-long periods ever were in 1931.

    Of course, if anyone wants to check the numbers for themselves, you can find the rate of return for an investment in the stock market, both with and without the reinvestment of dividends and with and without the effect of inflation, between any two calendar months since January 1871 using this tool.

    ~~~

    BR: Good catch — I transposed the 2 years in my head — I fixed it above.

  8. Investorazzi.com commented on Apr 29

    Reminds me of something Jeremy Grantham said back in January…

    Jan. 23 (Bloomberg)- Jeremy Grantham, the money manager who oversees $157 billion as chairman of Grantham, Mayo, Van Otterloo & Co. LLC, said investors should shun stocks and hold cash during the worst financial crisis in more than 60 years.

    “Don’t be a hero,” Grantham, 69, said today in an interview from his office in Boston. “Move to cash and let the other guys fish around for the bargains in the wreckage.”

  9. Karl K commented on Apr 29

    Barry, Alan ABELSON? ALAN??

    There’s bottom fishing in investing and there’s bottom fishing in linking.

    Meanwhile, I bought a few share of BAC at 35. It’s at $38 and change now. If THAT’S a “dandy whirl” (really, Alan should quit writing about the markets and opt for Harlequin romances) then I am a shoe-in to win “Dancing with the Stars.”

  10. Loren Steffy commented on Apr 29

    BizLinks and Open Comments | 4.29.08

    Shell, BP report record profit on oil and gas prices Continental may try to grow through alliance, not merger — meanwhile, United is left to ask Who’s Left in the Airline Merger Party? Number of homes facing foreclosure doubled…

  11. DonKei commented on Apr 29

    I could see where buying financials, w/ their privatized profits and socialized losses, would be as good a move as there is out there right now. Who cares if there are a ton of write-offs and losses yet to come? Uncle Ben’s hovering.

    The Bear Stearns bail-out was a jolting earthquake that changed the financial landscape as we know it. IMO, not for the better, unless you think burning dollars is a good way to heat your house. But change it did.

  12. Groty commented on Apr 29

    As much as you delight in degrading reporters for making irresponsible statements unsubstantiated by the facts, you should be be ripping Abelson’s face off for saying “the credit crunch…shows little signs of easing”.

    Since the the Bear Stearns blowup, virtually every spread product traded has tightened. In many cases the tightening has been extreme, suggesting the credit crunch is in fact easing: high yield credit spreads have tightened significantly; CDS across sectors and credit quality have tightened significantly; swap spreads are much tighter, the spread between FF and the 2 year treasury is positive, leveraged loan prices have absolutely ripped as spreads tightened.

    It seems irresponsible to say there’s little evidence the credit crunch is easing when market based prices for risky spread products suggest otherwise.

  13. TomD commented on Apr 29

    Only one thing to do: trade the anti-financials (SKF), using those rallies in the financials to reload SKF. It’s been fun. And I don’t think the fun is over.

  14. DownSouth commented on Apr 29

    ☺☺”On one hand, studying history is not especially reliable because people like to imagine patterns when none actually exist…”

    ☺☺”Lazy people see repeating patterns in the form of graphs and imagine like causes. Occasionally, technical analysis properly graphs the summarized actions of large groups of people in a way that offers very short term but erratic suggestions about behaviors. But these entrails need to be tempered by proper education. Most technical analysis is pure shit intended for the gullible.”
    Posted by: cinefoz | Apr 29, 2008 8:27:49 AM

    “The human mind cannot grasp the causes of phenomena in the aggregate. But the need to find these causes is inherent in man’s soul. And the human intellect, without investigating the multiplicity and complexity of the conditions of phenomena, any one of which taken separately may seem to be the cause, snatches at the first, the most intelligible approximation to the cause, and says: ‘This is the cause!’ “–Leo Tolstoy, “War and Peace”

  15. DownSouth commented on Apr 29

    ☺☺”This is only half correct, Barry. The decline in stock market values that began with the Great Crash of October 1929 reached bottom in June 1932. However, the year-long period running from July 1932 through July 1933 is the single best year for stocks on record, providing a real return to investors of 143.5%.”
    by: Ironman | Apr 29, 2008 9:13:45 AM

    “What a flood tide of returning hope was running in those first six months of the New Deal!

    “Once more the business men of the country began to know hope. The Federal Reserve Board’s adjusted index figure for Industrial Production in the bank-holiday month of March, 1933, had been 59. In April it jumped from 59 to 66; in May it jumped to 78; in June, to 91; in July, to 100 (as against a 1929 high of 125)…”

    “The speculators leaped into action. As the stock market spurted, out of the highways and byways came the little stock gamblers. For three and a half years they had been telling themselves–if they had any money left–that speculaton was no more for them. During the past few months they had been in the grip, most of them, of a mounting distrust of Wall Street bankers in particular and all bankers in general, and had been telling and re-telling derisive anecdotes in which bankers figured. But when they began to see the plus signs among the stock quotations, back tot he brokers’ offices they thronged, ready to stake their last savings on Commercial Solvernts and Standard Brands and the alcohol stocks and meanwhile as cold-blooded a lot of pool operators as had ever been seen in the unregenerate days of 1929 manipulated and unloaded, manipulated and unloaded. The Securities Act had been signed, reform was the order of the New Deal day, one might have expected these gentry to be newly cautious; but all such considerations apparently meant nothing to them. So violently did the stock market boil, so frequently were there five- and six-million-share days, that the total volume of trading in the month of June, 1933, and again in the month of July, 1933, was greater than it had been in any single month in the Big Bull Market of 1929–with the sole exception of the Panic month of October. Menawhile the grain market and the other commodity markets boiled too. Who could lose? argued the little speculators. ‘If we don’t ahve prosperity we’ll at least have inflation.’ (In 1932 the thought of inflation had prompted selling, now it prompted buying; the mood had changed.)”

    “Late in July the stock and commodity markets broke badly, and day after day the speculator’s favorites tumbled; one of these favorites, American Commercial Alcohol, actually collapsed from 89-7/8 to 29-1/8 in four days.”–Frederick Lewis Allen, “Since Yesterday”

  16. DownSouth commented on Apr 29

    “When it came, it came fast–and apparently out of a clear sky.

    “Toward the end of August, 1937, the stock market sold off and business showed signs of slackening. After Labor Day the retreat became sharper. Stocks went down fast and far… Only the fact that speculation previous to August had been moderate and well-margined, with the SEC watching carefully to prevent manipulation, kept the annihilation of values from having disastrous consequences outside the exchanges…”

    “Then see what happened to our familiar measure of the state of business in general, the Federal Reserve Board’s adjusted Index of Industrial Production. (Do you recall its previous ups and downs? Its high of 125 in 1929, its low of 58 in 1932 and of 59 in the bank-panic month of 1933, its rush up to 100 during the New Deal Honeymoon, its decline to 72 as the Honeymoon ended, and its wobbling rise thereafter?) At the end of 1936 the index had touched 121, which looked distinctively promising. As late as August, 1937, it stood at 117. Then it ran downhill, month after month, until by May, 1938, it had sunk to 76.”–Frederick Lewis Allen, “Since Yesterday”

  17. kents commented on Apr 29

    Look at the New Lows during each of these rises. I’m probably the lamest technician on this forum, but 4 New Highs and 588 New Lows during a “rally” tells me that the buyers will be disappointed.

    It really doesn’t require a PhD from NYU.

    k

  18. Ross commented on Apr 29

    DownSouth,
    My dear old Dad was a high school junior in 1937. As he remembers it, 37 was worse in many respects than 32. 1932 was a shock but thereafter people adjusted and there was hope in FDR’s ‘New Deal’. My Grand-Dad wanted to shoot who he called the cripled SOB but that’s another story.

    1937 seemed to come out of the blue. No-one was prepared. In 38 ole Dad joined the National Guard because they paid something and was called up in 39. The rest is history.

    Love your Tolstoy quotes. I prefer Dostoyvsky but no matter.

  19. DonKei commented on Apr 29

    Downsouth,

    Me too on the Tolstoy. Does “Downsouth” mean the American South?

  20. Eric Davis commented on Apr 29

    Brave call to imply that this will be the 30’s……

    Some super brave calls.

    Sure, we have a president as stupid as Hoover.

  21. pkut commented on Apr 29

    we’ve now had the worst economy since the great depression x 2 in the last 7yrs, each of which were independent. I’m surprised we haven’t all died fiery deaths.

  22. bluestatedon commented on Apr 29

    “Sure, we have a president as stupid as Hoover.”

    Hoover’s responses to the Crash and ensuing difficulties may have been inadequate or wanting, but if you look at the totality of his public service record vs that of our current esteemed President, Hoover comes out miles ahead in virtually every area.

  23. DownSouth commented on Apr 29

    Ross,

    My mother and father were also children of the depression, so I have heard lots of stories too. My father was working class, union man, so his take on Roosevelt was quite different than that of your grandfather. Roosevelt was certainly a lightening rod–people either hated him or loved him.

    But back to the topic at hand. The thing that I can’t get my mind around, comparing today with the 30’s, is that during that decade the inexorable march downward (regardless of the noise created by the afterglow and Little Bull Market of 1930, the New Deal honeymoon of 1933 and the “recovery” of 1936) included just about everything–stocks, houses, farms, food, oil, you name it.

    So far in this downturn, however, we have the prices of some things moving downwards, while at the same time other things are going up.

    So the comparison to the 1930’s doesn’t seem to hold. So I must admit, I am in a total conundrum.

    The number of people who, with an air of smugness and confidence, claim to have it all figured out is not small. But when I take a close look at their prognostications, I discern errors and inconsistencies.

    But I must admit that I find it fabulously interesting watching it all play out, keeping in mind that many people out there are hurting, and, horror of horrors, if the water continues to rise, I too could end up under water.

  24. DownSouth commented on Apr 29

    DonKei,

    I live in Queretaro, Mexico.

  25. Eric Davis commented on Apr 29

    … The rocket scientist economists have come up with a new way to hide the fact that we are all Broke/they have bankrupted us…..

    it’s called inflation…. I guess it’s not all that new.

    Wage inflation coming soon. Thank the FSM…. But that isn’t bullish for stocks.

    Funny that we can come up with slick ways to show that we aren’t broke, but we can’t figure out how to build Thriving economy.

    But who wants a thriving economy….I’m busy taking care of me….

    Can I coin that “Me-sider” economics?

    I think I’m just trying to speak riddles today.

  26. Andy Tabbo commented on Apr 29

    This is bear market for sure and we will see large declines. However, this should not preclude you from trading the bear market rallies that will inevitably come when pessimism and anxiety reach moments of unsustainability. If you read blogs like this and read the 100% bearish information, you may miss the 10-15% runs we’ll get on the way to 1077 on the S&P 500.

    We’ve had some really bad and scary headline last few days and the market can’t really trade down as there are waaaay too many people herded into commodities/infrastructure/metals/fertilizer/seed/coal/rails….and not in the broader market.

    The only difference between great traders and great investors is time scale.

    AT.

  27. gianluca carrera commented on Apr 29

    I am a bear market believer… I just hope I won’t be hanging dry in a few month time. Despite all these negative news, it looks like the market is forcefully trying to go higher… yet I fail to see the fundamental reasons for prices not to go down. I am just staying out for the moment. I might see lower prices, and if I am wrong, I will get back in with a better risk/return profile. Definitely not soon tough.

  28. DenverKen commented on Apr 29

    I was short the homebuilders all through 2007 and they had more rallies than you can believe. Every few weeks some moron (Usually someone like Paulson) would come out and declare the bottom was in for house prices/sales. UP would go the stocks in violent rallies….that would eventually fail. In the end most homebuilders lost 50% or more for the year, but you had to have conviction to not get shaken out of your short.

    Same thing now with financials (and retailers).

    Miners have been getting absolutely CRUSHED. Same thing on the opposite side…long term bull market with lots of crashes on the way.

  29. Ironman commented on Apr 29

    BR: Thanks for following up – it’s very much appreciated that someone with your workload and schedule can still find the time to go back to fix the little things!

    DownSouth: First, cool quotes! Second, you’re not alone in being in a conundrum regarding the present situation – the best way I can describe it is that we would seem to be experiencing a rolling bear market/recession, one where we have some areas of the economy are performing well even as other areas struggle.

    Then again, that doesn’t necessarily surprise me. The probability that we would have a recession this year has never been more than 50%.

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