Saturday, August 1, 2009

History Doesn't Repeat... (Part 2)

As the popular American humorist, Mark Twain said, "History doesn't repeat, but it often rhymes."

Last week's chart showed a stunning resemblence between the Dow from 1924-38 and the Nasdaq index from 1994-present.

This chart rolls the clock forward 6 years on the Dow Index, from the end of 1938 to the end of 1944. As you can see, while the stock market rallied at several points along the way, the overall action was mostly a slow decline. The final low was eventually reached in April of 1942, 40% below its level at the end of 1938.

So what does this possibly mean for the Nasdaq going forward? Well, as we know, history doesn't repeat! But if history "rhymes" the Nasdaq will bottom out around October of 2012 at a level more than 40% below today’s price level. Regardless of our expectations, we must at least be prepared for this possibility as we make our investment decisions.

Waiting three more years for the stock market to “get going again” is not something that most investors are prepared to do. Any investor who came of age during the bull market of the 1990s is still scratching their head, wondering what went wrong on the path of untold wealth. They may be waiting impatiently for things to “get back to the way they were.”

Of course “what went wrong” is that the stock market moves in unending cycles. Investors have become conditioned over the course of the past several decades to think that the stock market “always moves higher." "Buy and Hold" and "Buy the Dips" were profitable strategies.

You may recall from an earlier post (November 2008) that after the Dow topped out in 1929 it did not make a new all-time high until 1954. That's 26 years, a looong time to be patient! Likewise, the Dow gained no new ground from 1966 to 1982, a patient holding period of 16 years! So if this bear market does not ultimately bottom out until 2012, we will actually be getting off easy compared to other secular bear markets.

None of this should be viewed as a prediction. There is no crystal ball. While the Dow/Nasdaq comparison has been stunningly accurate over the last 15 years, it would be foolish to base our investment decisions on a belief that history will rhyme.

Rather than base our investments on predictions, the Strategic Growth Model will continue to align its capital with the current market conditions, profiting from the statistical edge it provides over the intermediate timeframe. For now, the market trend is UP.

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