Wednesday, November 5, 2008

Novembers after October crashes

I said it last week. Risk was high. From last Tuesday to this Tuesday, the market rallied huge (almost 20%). The US market hit 1005 on Tuesday (Dow 9,600). Does that mean that I was wrong (as I wrote it at S&P 930)? The jury is still out, but today's 5% drubbing back to S&P 953 at least points out that things are still volatile.

I started shorting again in recent days and I still see risk out there. Even if we are in a bear market rally, things got too overextended on Tuesday.

One interesting note from Barry Ritholtz today (courtesy of Dan Greenhaus, Equity Strategy Group of Miller Tabak + Co) talking about true October crashes (2008 of -17%, 1987: -22%):

The only analogous decline was the drop in October in 1987 which led to a subsequent 8.53% drop in November 1987.

the depth of the decline we just went through in October has only one parallel in the post 1950 time frame, which is 1987. So the next logical step is to head back to the 20s and 30s to get a handle on what occurred in that time period. Unfortunately, the Octobers of that time didn’t fare too much better. October 1929 was down 19.93%, October 1930 was down 8.88%, October 1932 was down 13.86%, October 1933 was down 7.82% and October 1937 was down 10.25%. In the first three instances I noted, the subsequent November was actually down an additional 13.37%, 3.31% and 5.89% respectively and November 1937 was down another 10.25%. Only November 1933 saw a gain, moving higher 10.27%.
Ordinary October declines (of the -3% or so variety) are usually succeeded by strong Novembers. Not so for October crashes. This is one of the reasons that I believe that risk remains high!

Another reason: we have had a financial earthquake in September/October. I was expecting aftershocks. Today was likely an aftershock. I expect more aftershocks and maybe another financial earthquake before it is all said and done. Prior to today, this were way too complacent for my liking. I still don't think a 1987 crash day can be ruled out. We are in a world of derivatives, leverage and declining liquidity. Warren Buffet said it best that derivatives are financial weapons of mass destruction. I am not predicting a 1987 crash, only that it remains a possibility here.


rick said...

I've been reading too many depressing financial commentaries, including yours. I'm starting to think that your prophesy of doom is realistic.

I mean, what if just one of the domestic automakers filed for bankruptcy? That would be enough to crash the market. Without government assistance, it will happen, and soon.

Adil Burney said...

A domestic automaker bankruptcy is a possibility and left to no government aid, is a definite. Sales are down 30% YoY with no improvement in sight. That being said, it is important to keep an open mind here. The case for doom is clear but it doesn't have to happen right away or at all. I could be 100% invested in 2 months for all I know as a bear market rally or new bull ensues. It is important to watch the market for clues.

rick said...

"I could be 100% invested in 2 months for all I know as a bear market rally or new bull ensues."

2 months is a very good number. The expected post October rally is over. It was as short as it was dramatic. Now there is no good news on the horizon. Without hope, the market can only retreat further. 2 months might just be a good time for round of bargain hunting. Even now though, GE and DOW are paying 7% dividends. They'll probably have to cut the dividends, but those companies feel safe.