Saturday, May 29, 2010

Into and out of Australian Bear Markets since 1984

Using data from Yahoo Finance I have constructed a series of charts which show the lead into the various bear markets in the Australian All Ordinaries and the recovery .

I have also constructed an average of the 5 major bear markets prior to the 2007 bear. This average has then been incorporated in each chart in an arbitrary manner to most closely, in my view, approximate the relevant bear market. The timing of the bottoms has been aligned, but not the actual lowest points. There is also a small amount of vertical compression or expansion in most charts. A green linear trend line for the average recovery is also shown.

This approach makes it easy to see an estimate of the dramatic out or underperformance during different periods. For example, look at the dramatic peaking of the market in 1987 compared to the general trend of the average market leading into a peak and trough.
All charts have the peak before the trough scaled to 1 (100%) so the amount of fall to the bottom can be read from the scale.

Please be aware that in some instances the end of the recovery in one chart may overlap with the period before the trough on another chart eg 1991 trough overlaps on 1992 chart and vice versa.

Click the chart images for a larger image. (Use right click > open in new tab.)


Dramatic bull rally to peak was clearly unsustainable.


The second trough is 1992.


First trough is 1991. 1992 trough is at centre. Note excessively fast recovery to new highs was not sustainable.


Very closely approximates the Average peak, trough and recovery.


The start of the unsustainable rally towards the 2007 peak can be seen towards the end of the recovery from the 2003 trough.


The scale of the fall from 2007 to 2009 makes it very arbitrary as to where the Average recovery is shown. I have chosen to align to the recovery side of the chart. I have also added the graph of the recovery from 1991, also adjusted to align to the recovery side of the chart. Last date is 1 June 2010, day 312, and the correction at the bottom was minus 14.9%. There has been a small rebound since to but is now only minus 11.85%.. The fall may well resume as most countries have broken below their 200 day simple moving average which in some markets is about 65% reliable as an indicator of a major change in trend. This possibility is supported by such fundamentals as:
* a possible second wave of real estate defaults in the US,
* the EUR crisis of sovereign debt owed by the PIIGS (Portugal, Ireland, Italy, Spain)
* the austerity being imposed on those countries
* the continuing possibility that default and withdrawal from the Euro by those countries will be more politically acceptable to voters
* the apparent end of a possible bubble and general slowing of the economy in China, a prime buyer of Australian resource exports.

If the 1992 trough is considered as a "double dip" of the 1991 trough, it started from the peak reached on 22 May 1992, day 341 of the 1991 recovery. In today's timing terms the equivalent high would be in about 6 weeks from now. As can be seen from the graphs, the recoveries vary widely in amount and duration so this is not a forecast.

See the recent post comparing recoveries for more information on the corrections that have occurred during the recovery phase.

Hat tip to Doug Short for his more sophisticated series of charts showing Dow falls and recoveries:

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