Great Depression Online Archive Issue:

Looking to Oil for Clues

Great Depression Online
Long Beach, CA
September 29, 2009

Inside This Issue You Will Discover…

*** Adapting to Fall
*** A Word on October
*** Looking to Oil for Clues
*** And More

Adapting to Fall

While the first day of fall was a week ago, in just two days it’ll be October.  That, for us, has always been the true beginning of fall.  You can smell it, feel it, and even see it. 

Already it’s still dark when we leave in the morning.  And not long after we get home from schlepping and slogging all day it’s dark again.  The days are shorter.  The nights are longer.  And the spiders have mysteriously returned from their summer slumber.

We don’t mind it and we don’t deny it.  We do, however, adapt ourselves to our changing surroundings.  Still, what can we really do about it?

~~~~~~How a Kid With a Ruler Can Make a Million~~~~~~

Jeffrey Kennedy shares how when he began his career as an analyst, he was lucky enough to have some time with a few old pros. One in particular told him that a kid with a ruler could make a million dollars in the markets. He was talking about trendlines.

Read More

~~~~~~~~~~~~~~~~~~~~~~~~~

Maybe not much.  But there are several things we try not to do…

First off we don’t do anything rash…at least we try not to.  And, second, we don’t do anything reckless…if we can in anyway help it.  For repeats and do-overs don’t exist in the world of investing, where the money you lose can be grueling to make back.

It is a simple matter of mathematics: If you lose 20 percent, you must then make 25 percent just to get back to even.

A Word on October

October can be a rough month for investors.  We don’t know why.  Perhaps the month just brings bad luck.

For example, on October 29, 1929, in what was named Black Tuesday and later the start of the Great Depression, the DOW fell 12.8 percent.  Even so, in terms of a one day loss, this was nothing.  Black Monday, October 19, 1987, was much worse.  The DOW crashed 22.6 percent on that single day.

But in terms of overall bear markets the crash that began in October of 1929 was far worse.  The stock market ultimately crashed 89.2 percent and didn’t recover for 25 years.  “Anyone who bought stocks in mid-1929 and held onto them saw most of his or her adult life pass by before getting back to even,” once noted economist, Richard M. Salsman.  On the contrary, following Black Monday it took just 15-months for the stock market to recover and 10 years later the DOW was up over 355 percent.

Last year, on the first trading day of October, the DOW opened at 10,847.40.  By Halloween night, the DOW had closed at 9,325.01…a loss of 14 percent for the month.

On October 9, 2007, the DOW closed at its current peak of 14,164.53.  If you bought stocks on that day, even with the market’s 47.6 percent rally off its March 9, 2009 low of 6,547.05, you’d still have a loss of 31.7 percent.

We don’t know if this October will go down in the history books as another October bust.  But from our vantage point, here’s some of what we see…

Watching Oil for Clues

The stock market, in our opinion, is entering October at a lofty nose bleed perch.  It is poised on the brink of a precarious ledge…all it could take is a cool breeze or a soft nudge for it to fall into the abyss.

Over the last two months insiders have been selling en masse.  We alerted you of this several weeks ago.  While the insiders may be early in taking profits, we doubt they’re wrong.

Plus just last week something else happened…

On Wednesday oil prices buckled from over $71 per barrel to $68.  By Thursday a barrel of oil had fallen to a 9-week low of just $66.  And for the week, the DOW dropped 1.57 percent. 

Sometimes different asset classes trade in tandem and sometimes they trade counter to each other.  And sometimes two asset classes that one time traded counter to each other now trade in tandem.  Of course, this is always true until the very moment it isn’t…but even that is not always obvious until sometime after the shift.

In the late 1990’s when the economy was growing, a drop in oil prices would result in an increase in stock prices.  Similarly, an increase in oil prices would result in a decrease in stock prices.  This no longer is true.

Back on March 9th, when the DOW bottomed out at 6,547.05, oil was at about $50 per barrel.  Since then, as oil trended up, stocks did too.  From what we gather, last week’s drop in oil prices was due to a sharp rise in stockpiles and a decline in demand.

A drop in demand signals that, perhaps, the economy’s recovery is not quite as robust as had been advertised.  If this is true, and if upcoming earnings reports reflect this, stocks could fall like passenger pigeon populations in the late 19th century.

In the meantime, we’ll be looking to oil for clues.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Yesterday the DOW spiked up 1.28 percent and oil traded flat at $66.86 per barrel.  Was last weeks price action just a brief correction?  Only time will tell.  But if you’re interest in learning how to use trends to trade the market don’t miss this:

How a Kid with a Ruler Can Make a Million

 

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