Rags to Riches, 23 March 2009

Rags to Riches
Investing Advice for the Common Man and Woman

Kenneth M. Ragsdell, PhD
23 March 2009

The Market

Every stock market downturn in the past 113 years since the creation of the Dow Jones Industrial Average, WITHOUT EXCEPTION, has been followed by a huge rally. For example:
The February 1906 to November 1907 bear market was followed by a 90% rally in the Dow between November 1907 and November 1909. The infamous September 1929 to July 1932 bear market was followed by a 352% advance in the Dow from July 1932 to March 1937. The January 1973 to December 1974 bear market was followed by a 53% rally in the Dow from December 1974 to July 1975, and, the January 2000 to October 2002 bear market was followed by a 94% rise in the Dow from October 2002 to October 2007.

Consider more carefully the crash of 1929:


Notice the repeated upturns, but an overall downturn from 1929 to 1932.


Advice

What can we learn from this behavior, and is it relevant to the situation today? I think it is relevant. No one can call a bottom, but certain observations seem reliable. Downturns can occur quickly, and bouncing along the bottom is normal. Are we at the bottom? I don’t think so. I expect we will see several bounces before a prolonged upturn (next year?). We need to keep this in mind as we make buy/sell decisions. Keep your portfolio balanced between bull/bear opportunities for now. There will be many opportunities for profit in the days ahead.