Everything Old Is New Again - Or Is It? (May 17, 2024)
Written May 17, 2024
In It Was a Very Good Year by Martin Fridson, the author examines the ten best market years in the 20th century, 1908-1995. The most outstanding year was 1933 with a gain of 53.97%, while the least remarkable, but still impressive was 1995 with an increase of 36.89%. Fridson bases his observations on commentary by contemporary financial journalists writing for Barrons, The Wall Street Journal, Forbes, and other prominent publications popular at the time, plus pronouncements by prominent market strategists. The two groups base their prognostications and market projections on current economic conditions and financial statistics, like auto production, inventory levels, employment, and credit conditions. Fridson aims to identify factors that might help identify future exceptional market years, his hypothesis: “Once in a while, ignoring the lessons of the past proves profitable. Relying on precedent isn’t an infallible approach to security analysis. But then, neither is any other method. Taking the long view, it appears unwise to be either too willing or too unwilling to ignore history.”
Fridson scrutinizes the recurring New Era concept, the label that characterized the excess optimism of the Coolidge economy of the late ‘20s-just before the 1929 Crash. The theory is that structural shifts render old valuation methods irrelevant, that economic prosperity is permanent and immune to cyclical downturns, and that the old cycle of economic changes has been suspended.? The problem, Fridson says, is, “Old, discredited ideas about the stock market never die. They don’t even fade away.”
John Murphy’s Technical Analysis of Financial Markets says that virtually all forms of forecasting, like weather forecasts, are based on past data as does technical analysis of markets. Advocates of the random walk theory dismiss the possibility of making predictions about the future direction of markets, alleging that no one can do better picking stocks than the person armed with darts and a board with a list of randomly selected stocks pinned to it, dismissing the value of predictions altogether.
Charles Dow, founder of The Wall Street Journal, and creator of both the Dow Jones Industrial Average and the Rail Average, believed that stocks didn’t “float around aimlessly like a balloon, but moved in distinct patterns.”? His work indicated that the two averages provided “graphic proof,” concluding the averages were “bloodless, impartial indicators,” a “barometer.” Taking the two averages together, sound conclusions could be drawn about future trends in the markets. Dow believed that the most reliable source of intelligence about the market was the market itself. Dow’s work was carried on by several successors at The Journal and more recently Jack Schannep in Dow Theory for the Twentieth Century. The original twelve principles of The Dow Theory have stood the test of time, assisting adherents in calling the bottom in 1932, the bear market of 1937, and the bull market in 1938. William P. Hamilton, Dow’s successor, called the 1929 bear market in an article, titled “A Turn in the Tide'', published in The Wall Street Journal on October 25, 1929.
Fridson relates the experience of Roger Babson (“The Delphic Oracle of Business”), who failed to call market turns based on his use of the prodigious economic data produced by his firm, Babson & Associates. On Sept. 5, 1929, “the renowned economic prognosticator,” unhelpfully observed that “sooner or later a crash is coming…”? It came sooner. “His research outfit had forecast a good market as recently as September 3.” Babson made the identical forecast in ’27 & ’28 and Barron’s said he had “been crying wolf for four years.”? A sell-off on September 5-an early warning after a “spectacular three-week rally,” was dismissed as a “technical adjustment.” Business Week dismissed the drop as “an attack of “Babsonmindedness,” clever journalistic phrasing perhaps but again, unhelpful.
Bill O’Neil of IBD tells of a Harvard professor who assigned students to write a paper on fish. The dutiful students went to the library, studied books on fish, and proudly submitted their findings, whereupon the professor threw them in the trash.? He told his students that to write authoritatively about fish, they must observe them in their native environment. The message for market participants is, to understand the market, study the market itself. Since Dow first began studying the averages, many market-based metrics and sentiment indicators have been developed that provide additional important indicators of market conditions - psychological and fundamental - in addition to future direction like relative strength, moving averages, and carefully detailed historical precedents of the behavior of both the indexes and individual stocks.
Fridson opines, “Then as now, interpreting the various trend and volume figures involved more subjectivity than one might suppose.”. He demonstrates fundamentalists’ opinions are widely divergent and sometimes right but more often, wrong, fearful when they should be hopeful, and optimistic when they should be cautious. Dow Theory advocates knew that and there is a record of their correct calls in Wall Street Journal archives.
How about now? What can be discerned from recent market action and how does it compare with the past?? From Oct. 23, 2023, until Mar. 21, 2024, the NASDAQ rose 31.85% (3995 points) over 147 days, continuing a primary uptrend from Oct. 2022. It then corrected 8% retracing 1316 points in 55 days. Declines that correct excesses of a prior advance conform to historical patterns. Historically, retracements have taken back 33%-66% (extent) of the prior advance in 3 weeks to 3 months (duration).? A 10% correction over 3 weeks is “intermediate” and mild in contrast to a bear market when the averages decline 20% or more. The most recent pullback didn’t meet either criterion. The recent giveback was 37% in duration. In extent, it was 33%. Another technical indicator, the follow-through day, marks a return to an uptrend. Yesterday, May 15, the NASDAQ followed through with a 1.4% rise on volume 68% above average, and higher than volume on May 14. No successful uptrend has ever begun without a follow-through day.
Fridson concludes: “Perhaps,…investors can genuinely profit from experience.” His examination of the best years covers a century. Charles Dow died in 1902 but his adherents continued their work well into the 21st century. Curiously, Fridson never mentions Dow or Hamilton or Rhea or Russell, Dow’s successors. Fridson finds that there are two criteria, one fundamental and one technical - useful in predicting the next? “Very Good Year”- easy money and starting from a low pricepoint (1933, 2003’s +50%? 2020’s 43.6%). However, to use Fridson’s own phrasing against him, with light modification for editorial purposes, “Phenomena observed in previous cycles are readily conceded to be departures rather than reprises. It’s just plain tough to teach a New Era fundamentalist (change mine) dog to recognize old tricks.”?
The Disruptive Stock Strategy Team:?
John Preston [email protected]?Liam Hibbits [email protected]