This Indicator Signals More Trouble for Stocks
By Tom Dyson
November 18, 2008
I've been studying the markets harder than I've ever studied before.
In the past few weeks, I've read a dozen textbooks on economics. I've also been watching the markets night and day on CNBC (with the sound turned off). I've only been sleeping four or five hours a night. And when I'm not reading books or studying the market action, I sit in my armchair with my eyes closed and contemplate the events going on around me.
Volatility is one indicator I've been thinking about. It's astonishing. For example, on Thursday, the Dow Jones logged its fourth biggest daily gain in the stock market since the Second World War... a gain of 6.7%. The highlight of the day was the 12.5% rally in the afternoon that erased a 4% morning decline.
On Friday, the market fell 5%, recovered all its losses by midday, and then fell 5% again.
It's a big deal when the stock market moves by more than 5% in one day. Since 1940, it's happened on average once every 734 trading sessions.
I analyzed the number of 5% moves up and down in the Dow Jones Industrial Average since September 1929. Here's what I found:
Decade |
No. of daily moves greater than 5% |
1930s* |
95 |
1940s |
3 |
1950s |
1 |
1960s |
1 |
1970s |
1 |
1980s |
6 |
1990s |
2 |
2000s |
4 |
Last two months |
9 |
* includes the last three months of 1929 |
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Volatility is always highest in bear markets. Notice the volatility in the 1930s, for example. And the six occurrences in the 1980s all came around the 1987 stock market crash. The two in the 1990s arrived during the Asian Crisis.
Here's something else I've noticed: The best stock market rallies happen in bear markets. The Great Depression featured almost all of the best stock market rallies of the last 80 years. One of the most famous bear-market rallies occurred in early 1930. The Dow crashed from 301 on October 28 down to 230 by Christmas 1929. Then it recovered back to 294 in April 1930 before falling to 41 by 1932. They say investors lost more money in the bear market rally of 1930 than in the crash of 1929.
Check out this list of the top 10 rallies in the Dow since 1929. They all occurred in bear markets:
Date |
Gain |
March 15, 1933 |
15.34% |
October 6, 1931 |
14.87% |
October 30, 1929 |
12.34% |
June 22, 1931 |
11.90% |
September 21, 1932 |
11.36% |
October 13, 2008 |
11.08% |
October 28, 2008 |
10.88% |
October 21, 1987 |
10.15% |
August 3, 1932 |
9.52% |
September 5, 1939 |
9.52% |
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As I look for investments for my readers, I'm going to assume we'll be in a bear market for some time to come. I'll be looking at only the safest investments... like cash, gold, T-bills, and blue-chip stocks with safe dividends.
With cash and defensive investments, your buying power increases as everything else falls. And with high-quality dividend payers, the stable income they spin off will act like ballast in the stock price and prevent them from falling too far.
Also, I'm going to expect incredible bear market rallies. Until the volatility subsides, I'll take these rallies as confirmation of a continuing bear market and not the beginning of a new bull market...
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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THE WORLD'S GREATEST INVESTOR IS BUYING BIG OIL
Score a small victory for Big Oil...
Last week, Warren Buffett revealed that his holding company Berkshire Hathaway just massively increased its stake in ConocoPhillips (COP).
COP is the third-largest oil company in America. It's a giant collection of oil, natural gas, and refining assets all over the world. By any valuation metric, the stock is trading for peanuts. Due to the widespread fear in the market right now, COP trades for under three times cash flow and 75% of book value. That's why the world's greatest investor just bought over 20 million shares in the third quarter.
How low can oil sink? Nobody knows for sure... $20 or $30 per barrel is possible. But as our colleague Porter Stansberry reminded us last Thursday, only when folks are scared to death of the stock market do world-class companies like COP trade for such low valuations. And it's only when folks are scared to death that the world's greatest investor buys 20 million shares at a time.
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The long knives are coming out in the mutual fund industry.
Faced with a soul-searing bear market and record outflows, funds are starting to lay off workers. And, although few have been sent packing lately, many mutual fund managers will be scanning the want ads soon, too.
The Dow Jones industrial average has plunged 36% this year, and staggering losses have sent investors fleeing the funds. The American Funds Growth Fund of America, for example, saw assets tumble to $128 billion on Oct. 31, down from $202 billion a year ago, thanks to market losses and investor redemptions.
Funds make their money by charging a percentage of assets, so the less money they manage, the less the management company earns. Already, some fund companies are announcing layoffs:
Fidelity Investments, the nation's largest fund company, laid off 1,300 workers Wednesday and plans to lay off an additional 1,700 in the first three months of 2009, the company said. Total layoffs would be about 7% of Fidelity's employees.
Legg Mason said it plans to cut 40 to 50 people from its workforce of 147.
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Billionaire Warren Buffett's Berkshire Hathaway Inc revealed Friday that it has nearly quintupled its stake in oil company ConocoPhillips, and disclosed a new stake in hydraulics manufacturer Eaton Corp.
Berkshire disclosed its investments in a U.S. Securities and Exchange Commission filing, in which it reported stock holdings on U.S. exchanges as of Sept. 30.
The company said it owned 83,955,800 shares in Houston-based Conoco, worth $6.15 billion, as of the end of September. That is up from 59.69 million shares as of June 30, and 17.51 million three months earlier.
Buffett had previously kept the June stake confidential. The SEC often lets Buffett, one of the world's richest people and perhaps its most revered investor, delay disclosure of his investing activity so others cannot copy him.
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