Is the Market due for a Crash?

[jkruer01]

I'm interested to hear everyone's opinions on this. Ok, we had a correction a couple weeks ago where the market dropped 5% in one day.

My question is, do you think that was the beggining of something larger or do you think we are in for a LONG FALL?

I personally think we are in for a LONG FALL and I have several reasons to back it up.

1)Look at all the Rule #1 stocks on your watch list. How many are actually below the MOS price? Not very many.

2)History says we will be for the next 10 or so years. The stock market goes in a stair step pattern where it will shoot up for several years in a row and then be flat for several years in a row. Shoot up...be flat. We have been in a flat market since 2000.
12/1896 - 1/1906 DJIA averaged 10.56%/year
2/1906 - 6/1924 DJIA averaged -0.24%/year
7/1924 - 8/1929 DJIA averaged 30.44%/year
9/1929-11/1954 DJIA averaged 0.07%/year
12/1954-1/1966 DJIA averaged 8.72%/year
2/1966-10/1982 DJIA averaged 0.05%/year
11/1982-1/2000 DJIA averaged 15.09%/year
2/2000-9/2006 DJIA averaged 0.98%/year
If you notice, the flat years usually last for 15 years or more. I personally think we are simply in the first 6 years of a 15+ year flat period. I think the markets will go up and down and they will flirt with the high and maybe go a little above it but eventually fall back down below it. In technical terms there is a resistance level around the 2/2000 mark.

3)Events in the Economy. In the late 90's there was "irrational exuberance" in the market. This finally stopped in the crash of 2000, 2001, and 2002. The Fed lowered interest rates to jump start the economy. The low interest rates caused housing to explode because you could borrow money for a mortgage for so cheap. This led to a different "irrational exuberance". People borrowed more money than they could possibly afford because they "knew" their house was going to go up in value. The lending companies lent out money like they had an unlimited supply. Two things happened. 1)Money was lent to people that it shouldn't be lent to and 2)People borrowed more than they should with an adjustable rate mortgage.
Now the first group of people are defaulting on their lowns and the 2nd group of people are having their adjustable rates increased which increases their monthly payments and now they really can't afford it. Both of these things are happening at the same time which is going to cause people to default on their mortgage and file bankruptcy. This is going to flood the market with homes and home prices will fall. The feul that has been fueling the economy ran out and the economy is going to fall. This will cause the stock market to fall.

All of this is just my opinion. I would like to hear what others think.

[maaakri]

good observations jkruer01,

Just for the sake of discussion, here are some gaps in that line of argument.
#1. Does less than N companies with MOS mean that the stock market is due for a fall?
I could argue that if

1. I can show a correlation between the number of MOS stocks and stock market downturns &
2. I can show a the threshold N (+/-r) under which the stock market has historically tumbled

then that line of reasoning has its merits.

#2. How do we know if the flat period has not shrunk historically and is now 6 or less years? With a sample size of 3 and a large Standard Deviation, it is not possible to statistically predict that the 4th period will be 15+ yrs.
1st Flat period: 15 yrs
2nd Flat period: 25 yrs
3rd Flat period: 16 yrs

As I said earlier, this is just for the sake of discussion, I think you could very well be right.

[jkruer01]

Good Points.

I guess my first point says more that the stock market is not undervalued. It would be hard to say it is overvalued using this logic. Because if a stock is at the sticker price then technically it is valued correctly but because we demand a 50% MOS then it is too expensive for us. So you are correct, point 1 doesn't necessarilly mean the market it overvalued.

I guess my point with the 15+ years is that out of the history we have it hasn't been less than 15 years yet. The data is definately not enough to develop a statistically significant sample. However, as they say...history repeats itself.

I'm not saying that the market is going to drop starting this week, month, or even year. But I think that there are definately some warning signs that we need to pay attention to. The fact is noone actually knows when the market will drop. There were people saying the stock market was overpriced in 1997. They had to wait 3 years for their prediction to be correct.

The good thing is...if you follow Rule #1 completely then you don't have to worry about it too much. Because the more the market becomes overpriced the fewer number of stocks will be below their MOS. If no stocks are below their MOS then you just wait in cash.

Good points...good discussion.

[npg]

Probabilities are the only things we can be certain of.

One might speculate about market behaviour --which is mostly emotional. However, concentrating on the business will lead to a higher probability that in the long term one's analysis will be right. Concentrate on the business and the people running it and not on the ratios, indicators and other formulaic methods. This will cut out the noise that makes us panic.

Fear of prices going down is only of relevance when you are on the seller side. For a buyer this fear is irrational. Let's say you want to buy a house. It does not make sense being afraid the house now being available for 100,000$ instead of 200,000$. As a buyer this should make you very happy indeed.

The same principle can be applied to the market. The question you must answer is: how long is my anticipated timespan and how solid is the business I invested in.

You can then treat the business as a higher rate savings account and rejoice when you get an even better deal over time.

This is why understanding the business is far more important than any spread sheet work or graphs.

Does this sound like Buffet? Bet it does.

Focus investing rules.

[tombrown1]

Good discussion. Buffett never worries about macro indicators - doesn't know what people think the market might do - he doesn't care. I have to admit to reading the chatter that's been out about a crash coming - but then I pretty much ignore it - because trying to predict these things is basically impossible.

What is possible (thanks npg) is knowing your business and trying to get it on sale. Then use your technical indicators to get you the hell out when and if it crashes.