Historical drops in DOW history...

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jbenko_IHB

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Out of curiousity I wanted to go back and see the big drops in history and where today's downturn compares to the previous.



Worst one obviously is the 1929 crash. The downward movememnt started in 1929 with a peak of 343 and ended in 1932 at its low of 43 a shocking 87.5% collapse. Compared to that one, most don't come even close.



So far today we are down 38.3 % from the peak. Is it possible for history to repeat? If it does, <strong>DOW will be at 1,733!?!?!</strong>



<strong>Start End High Low Variance</strong>

1929 1932 343 43 -87.5%

1937 1938 186 99 -47.2%

1972 1974 1,020 616 -39.6%

1987 1987 2,596 1,939 -25.3%

1999 2001 11,497 8,847 -23.0%

2002 2002 10,404 7,952 -23.6%

<strong>2007 2008 13,896 8,579 -38.3%</strong>



Most say that this bubble is much worse then the Great Depression, so you can see why Paulson is in panic mode.
 
You are right. My data source was using weekly intervals instead of daily. All of those figures probably can be tweaked slightly, but they are in proximity. If I have more time on my hands I'll drill down to historical daily prices.
 
One of the lessons on this blog for which I'm grateful is the buyer psychology.



Though we may disagree on the price, we all know owning a home is a worthwhile endeavor. And yet, when you look at the bottoms when the market over-corrects you wonder, "why didn't properties just get snapped up immediately?". They had to be worth even a little more based on recent history.



Looking at the current stock situation. I've already heard lots of people talking about snapping up stocks when the DOW hits 7,500 or 7,000. However, assume the DOW just keeps on sliding down, 6,000... 5,000... 4,000...



Last week, I would have said, "Yes! I'd happily put all my money into stocks and pick up those deals available as panic sets in." And yet if you watched the DOW lose 1,000 points a week, you would say, "hmmm... I guess I could wait until it hits 3,000, or maybe 2,000, surely at that point I can't go wrong."



If these stocks have true worth, they should be purchased at even if the DOW is at 6,000. Unfortunately, people do not want to analyze the fundamentals of a stock, they just want to make money. It's just like the housing bubble. Once the pattern of profit is smashed and the pain of loss is established, buyers are inclined to wait.



I personally believe the millions of people with money in 401k plans across the nation have helped to maintain stability. What happens when they panic (or is this what we are witnessing right now?).



Btw, I do not mean to suggest the DOW will drop below 8,000. My argument is hypothetical. I'm not predicting any performance, I merely want to point out that a number like "DOW at 1,733" seems crazy to us now, because surely the market would find "resistance" at a higher level. I think it is time to forget about whatever normal stock market behavior is.
 
Waitingtobuybyandby,



You hit on some great points. I view the market as money flow which I correlate to human behavior or psychology. To me, psychology drives the market. It doesn't matter if the fundamentals are there or not. This is kinda the argument we had in another topic. I mean look at MSFT and CSCO. Their P/E ratios are so low its not even funny. They have tons of cash and can weather years of recession so why the decline? Human behavior. Is CSCO a great buy now based on fundamentals? Hell yeah, but will human fear drive it down further? Hell yeah.



Some can't help but allow fear to consume and control their decisions and some of us enjoy feeding on peoples fears. Yum.
 
I wanted to get a better clue as to where we are with DOW JONES and where we might be going.



Based on all research I can find, DOW JONES historical P/E ratio as well as DOW/Gold ratio seem to be the best factors that might give us some insight.



During major crashes the DOW to Gold ratio was around 1-2. Meaning it took 1-2oz of gold to buy a point of DOW. The P/E ratio during each crash was also around 6-10.



Today if we take 8500/900 = 9.44 meaning it would take 9.44oz to buy a point of DOW.



In order to get back to a minimum of 2oz/pt of DOW, DOW JONES needs to be at 1800 based on a 900/oz of Gold. Which by some odd coincidence is close to the number I posted earlier of 1,733.

So either gold is going to skyrocket to 3K an oz or DOW is going to hell. At the same rate the P/E ratio of DOW now is at 14 if I remember correctly. So we have a long way to go till we reach 10 or could be as much as 6.



I just never heard of the DOW/Gold ratio so I found it pretty fascinating. Kinda make sense.



I don't know...maybe somebody else has more knowledge on this?
 
awgee was the first one here to point out the dow/gold ratio. panda has used it quite frequently. you can probably find it back in the "GOLD" thread.



i find it fascinating as well although still curious about the underlying relationship between the two. is it just coincidence in prev crashes the ratio always ended at 1-2? is the relationship direct or tied to something else?
 
I am seriously thinking of getting my entire retirement plan out, so I would say we are nearing the capitulation phase. The only reason I'm not selling is because I think this must be panic. Don't know if I can emotionally survive capitulation though.



I wish I'd thrown away all my money on a house and not on the stock market. And I'm no hedge fund investor. Watching my mutual funds burn makes me feel sick.
 
[quote author="jefa" date=1223680182]I am seriously thinking of getting my entire retirement plan out, so I would say we are nearing the capitulation phase. The only reason I'm not selling is because I think this must be panic. Don't know if I can emotionally survive capitulation though.



I wish I'd thrown away all my money on a house and not on the stock market. And I'm no hedge fund investor. Watching my mutual funds burn makes me feel sick.</blockquote>


Probably too late jefa. We are probably way closer to a bottom than the top... The time to rebalance that retirement plan was early this year or last.
 
[quote author="acpme" date=1223673609]awgee was the first one here to point out the dow/gold ratio. panda has used it quite frequently. you can probably find it back in the "GOLD" thread.



i find it fascinating as well although still curious about the underlying relationship between the two. is it just coincidence in prev crashes the ratio always ended at 1-2? is the relationship direct or tied to something else?</blockquote>


Here is what I found just now. A presentation done in year 2000.



in yahoo search type <strong>dow to gold ratio chart</strong>.



Its the first one down from the search. Its in PDF format. I couldn't link the PDF format.



Very interesting reading. On page 2 shows DOW to Gold ratio, and page 3 shows P/E Ratio of the S&P. S&P is a safe P/E ratio to look at in this comparison because DOWs P/E is almost the same as S&P historicall but slightly less. But they are virtually the same.



So you can see where in the crashes DOW/Ratio dips as well as the P/E dips.



Based on this and if the DOW truly is at the bottom, gold is underpriced and should go from 900 to 4,000!!!!

If gold doesn't go that high, then DOW should be at 1,800.



If gold goes to 2k in next coming years, then DOW should be at 4,000. Anyway you paint the scenario, based on DOW/Gold ratios it looks scary.



People can do what they like. But going to continue betting on puts till DOW hits 3-4K.
 
[quote author="ipoplaya" date=1223680463][quote author="jefa" date=1223680182]I am seriously thinking of getting my entire retirement plan out, so I would say we are nearing the capitulation phase. The only reason I'm not selling is because I think this must be panic. Don't know if I can emotionally survive capitulation though.



I wish I'd thrown away all my money on a house and not on the stock market. And I'm no hedge fund investor. Watching my mutual funds burn makes me feel sick.</blockquote>


Probably too late jefa. We are probably way closer to a bottom than the top... The time to rebalance that retirement plan was early this year or last.</blockquote>


I hope you're right. Luckily I was bearish enough to pull 20% of the entire portfolio out at Dow 13,000. I really did not think it was going to be this bad. I was ready for DOW at 9000, and thought I was being a "smart" long term investor.



But is a great depression drop of 85% possible? A PE ratio of 20 or less now could be a PE ratio of 50 in a year if no one is buying anything. CSCO and MSFT look great because people still have money. If we really have a great depression, no one will have money to buy computers.



But you look at all that money in Treasuries... it's gotta go somewhere at some point. *sigh*
 
[quote author="jefa" date=1223681307]If we really have a great depression, no one will have money to buy computers.

</blockquote>


I don't think that's completely true .. there's too much reliance on the infrastructure already. Besides, some sectors like virtualization actually save money. Done right, it can pay for itself in terms of hardware efficiency, energy consumption, rack space costs, etc. Paperless office is similar. If you've ever had to retrieve something from Iron Mountain, then you know ..



But then again, that's what I do for a living. I'm biased :)
 
On the Calculated Risk blog I came across this chart showing the correction from peak in the first year of the major corrections from the year 1900.



<a href="http://www.chartoftheday.com/20081010.htm?T">Stock Market Volatility from Chart of the Day</a>



People keep making comparisons to things not being this bad since the Great Depression. I believe this is the first statistic I've seen that is actually worse than that of the Great Depression era.
 
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