Rallies will create corrections. And corrections will create rallies.
By Daniel at 11 January, 2010, 2:45 pm
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We had a rally from 1982 to year 2000. That was an 18 year rally. A correction was needed to serve that rally. And a 9-year correction has been served.
The only question now is …. will the 9 years of secular bear market be enough to serve the 18 years of sustained rally?
For an immediate reference: The rally from 1932 to 1965 was a 33 year rally interrupted by minor corrections. A major correction happened from 1965 to 1982 before the next rally from 1982 to 2000 was able to start. That was 27 years of correction to serve the 33 years of rally.
Nobody really knows if the 9 years of correction will be deep enough and/or long enough to serve the 18 years of rally. Deeper corrections tend to spend less time while shallow corrections tend to spend more time.
Pay the fine or serve the time also applies to stocks and stock markets. Sometimes, pay the fine and serve the time also applies when the rally had gone into stratospheric levels. The Tulip mania of 1600’s killed that particular market for all intent and purposes. It was served a death sentence.
The rally from the 19th century to 1929 was corrected by an extremely deep correction of 1929 to 1932. A 3 year correction that practically served all rallies since the stock market was invented with the Dow Jones shredding 90% of it’s value. Dow Jone practically served a “death sentence” in 1932.
We more tolerant these days. We abolish the death sentence already. Dow Jones serve only 54% loss during the last selloff from 2007 to 2009. Prior to that, it served 39% fine from 2000 to 2002.
Nasdaq, the main culprit in the 1900’s served more than 80% loss from 2000 to 2002 and was never able to recover more than 1/3 of it’s value from 2002 to 2007. But did not go below the last low of Oct 2002 in March 2009. It was able to produce a higher low.
SnP which got saddled by the housing, retail, and banking sectors got hammered with with almost 58 percent penalty from 2007 to 2009. Prior to that it served about 54% penalty from 2000 to 2002 as it was saddled by the Nasdaq components.
The banking sector $BKX which was blamed most served 84% correction from 2006 to 2009. Worse than Nasdaq did.
The rally from 2002 to 2007 was not a bull market rally. It was a bear market rally. A corrective process and part and parcel of the 2000 to 2009 secular bear market.
Learn the lessons of history.
Young markets tend to pay the fine rather than serve the time. Dow Jones in it’s younger year in 1929 paid up 90% fine. The young Nasdaq paid 80% fine in 2000 to 2002 and still paid more time from 2002 to 2009. The young Chinese market paid 72% fine from 2007 to 2008. Other countries in the emerging markets paid 80% or more correction to serve their corresponding rallies during this last meltdown.
Rallies will have corrections and corrections will provide the means for more rallies. There will be lots of reasons for rallies and lots of other reasons for corrections and reasons will differ in each occasion. That is why there are different degrees and duration of rallies and there are also different duration and severity for corrections.
The important part is to recognize that rallies will have corrections and corrections will provide the means for more rallies. It is human nature among the majority of people that hope and desire for living and to better their lives will try to overcome any event, even life threatening ones.
Young people do not fear death nor loss of wealth and older ones will be more apprehensive of losing their remaining life on the earth, including their possesions. As long as the population gets regenerated with new borns; the society that comprise that population as a whole will aspire for more and better things in life. And so rallies in stock markets will happen again and again. And so do the corrections.
- john qp
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