Apr

4

aberdeen bullThe bull move by many measures is the greatest in history. Birinyi looks for big 10% turning points in markets and found that by some measures this one is the greatest in history going up 1/5 of a % a day versus 1/6 % a day in the 10 others of comparable rise to this. And we're right in the midst of another such surge with exactly 20 days of consecutive 4% or more moves, an event that's only occured 6 times in last 15 years, with previous dates 5/28/1997, 4/06/1998, 11/24/1998, 4/12/2000, 5/15/2001, and 1/27/2004.

One notes also that we haven't had a a month minimum since Feb 8th, 2010. Since Feb 8, 2010, the median S&P 500 stocks is up 13%, and the top 10 are each up more than 40%. An opposite scenario is working itself out in the world of fixed income. How can we make sense of what is happening?

To what should we turn in conjunction with the bearish feedbak that counting gives. I have been considering the fields of economics, martial arts or romance. What fields would you suggest?

Vince Fulco comments:

The thought of a pendulum with too much transitory force being applied to one side comes to mind. 

Russ Sears writes:

In my opinion to understand the crisis and the resulting recovery, you must understand that most of the crash stemmed from "model risks". People had bought these wonderfully complex AAA structured products that suddenly you had to be able to model the expected losses. In the past this was considered only a remote possibility with no need to model. Once it became clear that much of this "structure" was mush, it was equally clear that these things really could not be modeled well. A slight change of the breeze from the butterfly caused wild swings in the heavens.

Models with even a slight downward trend in the housing markets quickly turned into a death spiral in housing. AAA suddenly were worth pennies. And those that bought them were those least able to absorb the losses or downgrades, further cascading the price due to illiquidity.

One must wonder if this recent reversal similarly has the "all clear" signal being given, and people are coming out of their bunkers to see some rays of sun. In other words which came first for the pendulum, the crash or the recovery?

Ken Drees writes:

Some recent puffy white contrary clouds that have passed my eyes:

advertising aimed at gold straddles

advertising oil calls and bull spreads

themes of money market money needing to go to stock market to earn advertising mailers about apple type clone micro caps–a ground floor opportunity advertising for homeowners to lock in natural gas now–don't wait for summer since rates NG rates can't go lower best 12 months in recent stock market history and the recovery isn't even rolling yet at full steam.

Bond bears are simply frothy–they can't wait to feed! The fed is in a box and its locked and its under water.

Lots of interesting hooks in the water in many markets. I am not surprised since trends have been running themselves quite far without pause, and thats the action that creates the hooks–the unarguable facts of self reinforcing trend. Voila!

Kim Zussman suggests we look at the big picture:

The attached plots log [base 10] (SP500 close) every March from 1871-2010, using data from Prof. Shiller's website.

In the context of history, the recent decline and bounce don't really stand out. However stock returns of the recent decade are noticeably different than the prior two, and rather resemble the pre-WWII period.

Next, Kim Zussman looks through a magnifying glass:

Using Shiller's SP500 monthly data, here is comparison of mean monthly returns by decade 1900-2000

 

Note that the 2000 decade was one of only 3 (1910, 1930) with negative mean monthly returns. The two prior decades, 1980's and 1990's, both had the largest mean monthly return since the 1950's, and the 50's, 80's, and 90's - the top 3 - all occurred in the last half of the century.

I also plotted log(sp500) within each decade. Drift is noticeable in some of the decades, and noticeably absent in others.


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