Legends of the Fall

By -

This will be my last post until Monday. I'd like to forget about the past two weeks, thank you very much.

The market's rise over the past 4 months has been spectacular, and I think it might have more to go. But let's give this a bit of historical context.

Below is the Dow Jones 30 shown during a different bear market rally. In this instance, the market went down 51% and then went up 52% (I will step in here and gently remind folks that a 52% gain after a 51% fall doesn't bring you back to a profit, since you are staring with a damaged base).

0724-dowold

This is very similar to what we've seen recently, although in spite of the market's strength, it could still climb some more and be within the bounds of this historical parallel. We've gone up "only" about 41% so far, so it's entirely possible we could claw our way back to the psychologically-meaningful 10,000 on the Dow (and, boy, wouldn't that make headlines!) I've tinted in green the climb we've had so far, and I've tinted in magenta the "extra" portion we might climb given the historical analog.

0724-dowRecent

We don't know the future, but we do know the past. Below is the subsequent market action following the example on top. I have, once again, tinted in green the countertrend rally. As you can see, the 52% rise didn't matter that much once all was said and done.

0724-dowPlunge

This isn't to say it'll happen again. Based on what the past two weeks have done to my sense of certainty, I figure we could be out Dow 20,000 by next Friday and not surprise anyone.

But the point is to understand that big percentage gains over short amounts of time don't necessarily hold up. Thus ends the sermon, and thus ends these two wretched weeks. I'm going to now go and get as far away from a chart as my feet will carry me.

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