Profit taking or more

Compare the 2001 recession with today.
http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=1&chdet=1205380233000&chddm=491878&q=INDEXDJX:.DJI




From 1994 to early 1998 the market more than doubled from 3,900 to 9,167. Suddenly, in late 1997 problems erupted in East Asia. The cause was a credit crisis: $40B was given to Thailand, South Korea, and Indonesia. Japan started to collapse and the US bought a few Billion dollars of yen.


The world's financial markets 10 years ago were a lot smaller and so were these economies. This money meant a lot more back then.



Then the Russians got hit. Another $23B was required from the IMF. Then US funds got hit - Longterm Capital management ended up losing $4B.

In just 6 months, the Dow crashed 18%.



Then - surprise - Greenspan entered. Liquidity was injected into the market and it surged 40% to 11,000 in just 8 months. Then it collapsed again - falling 10% in a month. It rose again as Y2K approached and companies stocked up 'just in case' - creating a false image of growth.



There were several peaks and troughs, but each peak was lower and each trough deeper. In its last major cycle, the market collapsed 20% over a 3 month span, rose 20% over 6 months and then crashed 25%.



Behind this play by play, we see
* 35% market drop
* took 30 months
* typified by 4 major peaks and 4 major troughs
* in each mini-cycle, Run-ups were usually 6%, run-dwons were usually 10%
Each peak was lower than the one before it, and each valley lower than the one before it.



Now look at today:

We see the same things happening:

* Each trough is lower than the one before it (T2 vs T1), and each peak is lower than the one before it (P2 vs P1)
* The recent drop has fallen below the first gasp. When this happened in 2001, the market then ran up 10% over 2 months. But it then crashed even harder, falling 18% over 4 months.

If we expect this to resemble the last recession, what lessons should we draw:

1. Market drop of 30% - that puts us at 9,800. In the 1990-91 recession, the market dropped 20%. In the 1987-88 recession, it dropped 33%. So a drop of 30% is high, but not unreasonable.

2. Duration - the last stock market collapse required 2.5 years. The 1990 collapse lasted 6 months. The 1987 collapse took 4 months - 33% of stock values wiped out in 4 months. Why did the recent one take so long? The Y2K effect dragged things out and distorted true demand. It sent confusing signals. Additionally, Greenspan's heightened liquidity pushed the market up

3. Economic Lethargy Overcomes Liquidity - Eventually the economic cycle returns.

I would argue that the internet is speeding things up. We just dropped 15% in 4 months. It will be the last collapse sped up.

I would also argue that increased globalisation will slow the fall, but not the depth.

Lastly, I would argue that we will hit 10,000 this year. Folks could argue the Fibonacci technicals. I just assume a bottom of 30% based off of the extremely bubbly conditions. Add a big dash of consumer belt tightening, over extended financing, another 1990s style global credit squeeze and real estate speculation driven mania, and we are facing severity in the markets.

I also note that in the last recession, once it was clear that the market was heading down, each trough was 10% lower than the last one, as if market sentiment drove it that way. We just hit 11,700, so the next stop will be (based on that logic) 10,500.