Two Perplexions come to play in my wanting to write about Zweig’s conditions. First perplexion is that people cannot agree as to whether or not we are in a bull or bear market; and second, people cannot agree as to whether or not we are/will be in a recession. I conclude, therefore, that much of this confusion is due to the perpetual need to read the economic tea leaves or lick one’s index finger and hold it up to find out if the ill winds are blowing us toward something malefic. It’s Ed Young’s Seven Blind Mice but we have to winnow out all of the confusion among the 100 (or so) blind mice that serve as market pundits.
I like Zweig's objective parameters. It provides some empiricism for us to evaluate the opinions of other market opinion makers. Zweig writes:
”The big money is made or lost in stocks during the most violent bull and bear markets. The bad news for those who crave action is that the market does not behave dynamically all that often. Even within the great bull market advances, there are periods of lull. I would estimate that stocks spend only about 20% of the time in the most active phases of the bull trend and only about 10% in the severe downward periods of major bear markets.Roughly 70% of the time stocks either meander in a neutral trading range or undergo minor rallies or declines within their various bull and bear cycles.During that 70% span—let’s call it the neutral area—your overall market strategy does not matter all that much…."
Zweig defines a bear market as follows: “a decline of at least 15% in each of the three important stock averages:the Dow Jones Industrials, the S&P 500 Index and the Zweig Unweighted Price Index (or the Value Line Indes, if you prefer).” I suppose that one could throw in the NASDQ to replace the ZUPI/VL index. I’m not sure if anyone has addressed this. Based on his definition, as there was not at least a 15% decline in all three indices in June/July, I’m not sure that we had a bear market within this description. See table below of May highs/June-July lows for DJI, NASD and S&P.None of the main averages achieved a decline of this magnitude.
Extreme deflation characterized by a PPI index drop of 10% on a 6 month average of annualized m-t-m changes.Take current year m-t-m inc/dec and average it with the last 5 months (sum the mtm change each month for the last six months and divide by 6).If that 6 month average is at least –10% then you have cleared this test; (I've not calculated this. I don't think we are there. I think that with the ISM falling, we will BEGIN to see where that calculation becomes meaningful).
Ultra high price/earnings ratios.He labels 10-14 aS normal P/E range. Upper teens and twenties is what he calls high; and (we are in this level now).
Inverted yield curve.Zweig used the Moody’s Aaa Corporate Bonds yield as the long term rate and 6 month commercial paper rates as the short term rate. (I've not calculated this). Addendum 11.13.06--Of course we all know that we have an inverted yield curve, and SFO did a wonderful story on that which you can find here. http://www.sfomag.com/articledetail.asp?ID=1946685477&MonthNameID=July&YearID=2 I've just not calculated it using MZ's method. So, some food for thought as we think about recessions and market corrections.
6 comments:
Marty Zweig....showing your age,oops,experience,Leisa. For most folks, defining the market is pretty simple. A bear market means you are loosing money, a bull market the opposite. I call that a "Reagan" (the opposite of a "Carter").
Happened to be on a Coast Guard boat that docked alongside Zweig's 100 million plus destroyer-sized yacht at anchor in Ft. Lauderdale last winter. Not bad for a lower-middle class Jewish kid from East Cleveland, Oh. But I don't have an autographed copy of his book. You win.
Nice, dense blog today!
There are some really nice things about getting older. First, you have all of these wonderful friendships that become richer and denser still. I had the most wonderful day on Friday where I had lunch and drink/appetizers with two of my friends whom I've known for at least 20 years. Second, you just don't give a damn about what other people think. You can dress, say and act as you please. Of course, if you are overly foolish in any of these there are still consequences but not nearly as dire as when you were in your 20's.
Left and right again reach a common conclusion. There is hope.
The graphics were not coming in clearly so I may have missed some of your point.
Showing your age?
If I read your previous post correctly then you are only 2 years older then I.
The odd behavior of the market is somewhat explained by the fractal nature of its movements (earliest described by Benoit Mandelbrot). This same fractal nature predicts that large swings in pricing are both possible and likely as a condition of the market dynamics. The brief collapse in 1987 is often suspected of being such a "non-explained" movement, and the current move upward by the DJIA strikes me as being very similar in nature.
If you add in the "black swan" events (outliers that cannot be anticipated) popularized by Taleb, then you have a much riskier market then is generally perceived. Buffet quite some time ago noted that to equate beta with risk was absurd. A tape where he mentions this (when discussing LTCM fiasco) can be found here on the Nov 1 posting:
http://www.businesspundit.com/
Buffets discussion of LTCM I think is very on point.
russell120--Thanks for the note on the graphic. It's one of those, "I cannot see what you cannot see". It was a table of the DOW/S&P/NDQ highs/lows and May and lowest point June/July.
Regarding age...we're still young.
I appreciated your mentioning Taleb. I will definitely check out more of his work, if I feel like I can hum along. His quote on his home page http://www.fooledbyrandomness.com/
[ "My major hobby is teasing people who take themselves & the quality of their knowledge too seriously & those who don’t have the guts to sometimes say: I don’t know...." (You may not be able to change the world but can at least get some entertainment & make a living out of the epistemic arrogance of the human race).]
Since I've said throughout life that the greatest sin in life (okay, you have to excise out killing, raping, and maiming), is taking one's self too seriously. But in retrospect, I think that people who kill, rape and maim probably take themselves too seriously, so I may not need that qualifier.
Agree with your quote on Beta. Roger N. had an interesting post on his blog putting up WLP (low beta) and another stock. WLP didn't look too stable!
Here it is 2 years later and I am just now reading Zweig's book... looking for some sense in this crazy market! FYI - Your blog came up when I Googled ZUPI. Wonder what Marty is doing now????? 2008 doesn't fit his models.
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