Sunday, January 11, 2009

As the calendar turns

A rare event occurred as the calendar turned from 2008 to 2009: A single trading day when at least 75% of New York Stock Exchange (NYSE) stocks rise is uncommon (there have been only 65 such occurrences in the last 10 years), yet this happened on three consecutive trading days from December 30 through January 2 (79%, 83% and 82% of stocks, respectively).

According to Bespoke Investment Group (B.I.G.), the market has performed a feat like that only twice before—both times in 1938. In each case, the Dow Jones Industrial Average was positive during the following day, week and month.

Last year was the single worst for the S&P 500 since the Great Depression—1931 to be exact. Nothing escaped the carnage, with global equity, credit and commodity markets imploding, and only U.S. Treasuries saving the day.

I asked a number of my Wall Street friends the following question during the holiday break: There were 253 trading days in 2008. How many days was the market (S&P 500) up versus down? With no exception, the answers were heavily skewed to down days making up the majority. Nope. Remarkably, the market rose on 126 days, and the market fell on 126 days (with one flat day).

So then what drove the overall massive market decline? The skewing of the down days. The average up day increased 1.6%, but the average down day decreased 1.9%. In addition, there were 42 days (nearly 17%) when the market rose or fell by more than 3%: 19 days that were up and 23 days that were down.

Clearly, volatility was off the charts, particularly following the Lehman Brothers bankruptcy in September, with 18 single-day moves of at least 5%. There had only been 17 such moves in the prior 53 years! In October, stocks enjoyed two of the six biggest one-day percentage gains in history—but gave back all of the gains, and then some. Four of the 20 biggest daily percentage declines in history occurred during the last four months of 2008.

Reviewing the 10 worst calendar year total returns for the S&P 500, take comfort in knowing that the average subsequent five-year annualized total return was 10.8%, with all five-year periods in positive territory—even those that began with 1931's 43% drop and 1974's 27% fall.

NDR did an interesting study of "waterfall" declines, similar to what we experienced last fall. In waterfall declines, the Dow loses more than 20% in a short period, and near the end, the 10-day average of NYSE total volume rises to two times its average seen just a few months earlier. In the majority of cases, the end of the waterfall decline wasn't the end of the bear market.

However, in the composite average, the lows were tested but not broken, followed by a basing phase of up to three months before a breakout to a new bull market.

Three post-waterfall phases were designated, and it appears to us that we're currently in the second phase—bear-market bottom to recession end.

Given current cash hoarding, there's now $8.85 trillion held in cash, bank deposits and money market funds. That's equal to 74% of the market value of all U.S. companies—the highest ratio since 1990, according to Fed data compiled by Leuthold Group and Bloomberg. According to, assets in money market funds alone are now enough to buy 42% of the entire S&P 500 index.

The latest asset allocation survey from the American Association of Individual Investors showed another push into safe investments. Individual investor allocations to the stock market dipped to 42%, the lowest since 1991. And these folks' investments in cash instruments moved up to 42%—the highest in the history of the data (November 1987).

Never before have these investors allocated as much or more to cash as they have to stocks. The only other times when the two allocations came close were in January 1991 (42% to stocks, 38% to cash) and October 2002 (43% to stocks, 39% to cash). Both turned out to be good times to be taking a long-term contrary stance against these investors.

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