A Typical 20% Correction…But This Time Is It Really Going To Be Typical?
A Typical 20% Correction…But This Time Is It Really Going To Be Typical? by David Schectman – Miles Franklin
It is commonplace that investors believe that the current stock market (let’s use the Dow average here) plunge will end up as another “typical” 20% correction. But is it really “typical?”
With no special knowledge where it is heading I believe we can still draw some inferences from the numbers.
Let’s take a look at the performance of the Dow, for the past 20 years. That’s a reasonable time frame, and it co-insides with the big rise and fall of gold and silver.
The Dow numbers, presented below, are very interesting. They approximately represent the high and low points before bull and bear markets set in.
December 1999 17273 (top)
September 2002 10,568 down 39% (bottom)
September 2007 16,800 (top)
February 2009 8390 down 50% (bottom)
January 2018 26,593 (the top)
January (7) 2019 23,503 down 11.6% so far, and trending down.
From the low of 8,390 the stock market rose 18,226 points (wow!) to 26,616, a gain of 317%. This move is much, much larger than any previous move in the last 20 years, or ever. Common sense should tell you that the larger the move up the larger the correction on the way back down.
A 20% correction from the peak at 26,616 brings the Dow down to 21,292. We are still 2,291 points above the 20% typical correction. A 20% correction is still possible, but looking at the past 20 years, I would not bet on it.
A drop equal to the first bear market bottom in 2003, on the above list, would drop the Dow to 18,900.
A drop of 48%, equal to the one that bottomed in 2009, brings the Dow down to 13,850. Considering that the Dow rose 18,226 points from the low in early 2009 to the recent high of 26,593, a correction back down to 13,850 is not unreasonable. It is still 65% higher than where this bull market started. This kind of a “correction,” or bear market, is reasonable to expect. 20% is not. The bull market lasted too long and went up too high for a mere 20% drop to correct the exuberance in its recent bull run. That would leave the Dow still at over 21,292 up from the launch point at 8390).
So how did your gold do during the same time frame?
From 2000 into 2011, gold bottomed at $275 and rose to $1,900. That’s a gain of $1,625 or 591%. The Dow’s total gain over the same 20-year period was 317%. Silver did even better, much better.
It’s hard to believe. It “seems” like gold went nowhere and the stock market was the place to be in the last two decades, but that’s not true. The 11-year gold bull market was considerably stronger than the Dow’s current seven-year bull market, which seems to be ending. It even surprises me.
That’s “normalcy bias.” We expect the recent history to continue. It’s the new normal. That’s how us gold bugs felt when gold hit $1,900 and silver hit $50. We thought the move would continue. When gold and silver started to correct, we thought the “correction” would be minor, perhaps 20%. Well, we sure were wrong. Probably as wrong as today’s stock market bulls will be, as the Dow continues to drop in 2019.
Gold, silver and the mining shares did extremely well from 2000 into 2011. There were two big stock market corrections in that time frame. The inference that I draw from this is that gold does very well during stock market bear markets. Even now, gold and silver are rising as the stock market falls.
A falling dollar and rising interest rates are also very gold friendly and all three, the falling stock market, falling dollar and rising interest rates are aligned.
I have no idea how high gold will go, but it “could” go up a lot higher, possibly even higher than the last peak. That would not surprise me.
How about silver?
Silver went up 11-times from $4 to $50 in the same 20-year period. That’s 1,100%. It makes the gains in gold and the Dow look very ordinary. Then it plunged, not your “typical 20%”, a PAINFUL 75%. Jim Sinclair calls silver, “Gold On Steroids.” It rises higher in bull markets and drops harder in bear markets. Had silver experienced a “typical” 20% correction it would have bottomed at $40. Even a robust 50% correction left the price at $25. It fell much, much more. That’s why it is so cheap, so undervalued now. That’s why the silver to gold ration now sits at nose-bleed levels of 82.16 to 1.
The following graph shows this ration for the last 10 years.
It’s been as low at 15.13 to 1 in December 1969. It was 38 to 1 at the peak of both gold and silver in 2011. By any metric, it is still way too high and as both gold and silver rise in this bull market leg up, the ratio should continue to head down, favoring silver.
Predicting anything related to the economy or the precious metals is not a science. The markets are highly managed, or manipulated is a better term. But that said, all markets, precious metals as well as equities, bonds and real estate experience periods of healthy growth (bull markets) followed by major corrections that correct the over-exuberance (bear markets).
We all enjoyed the gold and silver 11-year run up, and then suffered through their 6+ year correction. They are now moving back up again. The same patterns work with stocks too. Stock holders suffered through two large drops after the turn of the century. They then reversed and made a lot of money for those who owned them. And now they are headed back down, to correct for over-valuation. I still maintain that the reason for the fall in precious metals and the rise in stocks was a direct result of interest rates falling to zero and trillions of Fed dollars entering the market. Economic growth didn’t cause the run up in stocks. Low interest rates and massive money creation created the run up (and also fueled the economic growth). So ask yourself the question: What is the current Fed policy on interest rates? And what about the Fed “removing” $60 billion a month from the economy by selling down its bond portfolio? These events are the opposite of the environment that fueled the bull market.
The following is an excerpt from an article by SRSrocco.
I would like to focus on the Dow Jones Index. If we look at the Dow Jones Index, we can see what took place in 2007-2009:
In December 2007, the Dow Jones experienced a large sell-off but corrected higher before the end of the month. The large wick at the bottom of that candle shows just how far the Dow fell. It lost nearly 3,000 points before reversing higher. Over the next four months, the Dow consolidated and moved back up to the 13,250 resistance level. Once the Dow Jones Index touched that resistance level, it then fell precipitously over the next ten months
In looking at the Dow Index today, we also see another large sell-off in December. Interestingly, the Dow Index closed on the last day of the year right on the 25 Month Moving Average (BLUE).
I believe the Dow will try to consolidate higher over the next few months and will probably try to retest that 24,000 level. Of course, there is no guarantee that this will happen, but I have been watching the markets more closely now, INTRA-DAY TRADING, and I can tell you, that is how the markets work.
Now, because the Dow Index is much higher and has a great deal more leverage and less liquidity today than it did in 2008, we could see a much steeper crash. But, if we don’t get a panic crash, it will likely take until the end of 2019 or early 2020 before the market reaches a low, but not the ultimate low.
If you look at the 300 Month Moving Average line (PURPLE), you will see that the Dow Index fell right to it in the first quarter of 2009. If it does the same thing this cycle, it will at least fall back to the 11,800 level (shown at the right). Again, this will not be the ultimate low in the Dow when the Falling EROI destroys the business cycle for good.
2019 MARKET MELTDOWN: What The New Year Brings
If history is our guide, we are on track for a severe market meltdown in 2019. While the U.S. broader indexes remained in record territory for most of 2018, December turned out to be a complete disaster for stocks. So, even though the markets have reversed higher from their Christmas Eve lows, this is nothing more than a bear market rally.
It’s really that simple. Thus, all the hype about “Fed Market Rigging” to push the markets up a record 1,000 points following the Christmas Eve massacre, becomes white noise as markets always correct higher after a massive selloff, with or without the Plunge Protection Team (PPT). Furthermore, the notion put forth by members of the Alt-Media suggesting that the Fed rate hikes will cause another market crash, and wealth transfer makes no sense in an EROI Collapse (Energy Returned On Investment).
Despite a Friday selloff, gold and silver prices finished higher for the week, with silver outperforming for a second week. Gold ended $3 higher while silver finished 32 cents higher on the week. As a result of silver’s outperformance, the silver/gold price ratio tightened in again, this week by nearly one and a half full points to 81.6 to 1. We have a very long way to go before silver could be considered fairly valued on a relative basis compared to gold and truth be told, in terms of predicting what the ratio will look like when we get there, I’d rather not say out of fear it would sound too outlandish.
2019 Money Metals Outlook
Precious metals markets enter 2019 with an opportunity to shine. Several major bullish drivers are lining up to start the New Year – including technical, fundamental, monetary, and political drivers.
Before delving into each of them, let’s consider where we’ve been over the past 12 months.
To be frank, 2018 wasn’t a particularly bright year for gold and silver prices. Gold will finish with a slight loss; silver with a larger loss just shy of 10%.