Tuesday, May 8, 2007

Which Market Is It?

There are several columns out right now comparing the current market to various other historical periods.

Dow Parallels 1927:

The surging Dow Jones industrial average has rallied for 24 of its past 27 sessions - raising some alarm bells because that hasn’t happened since 1927.

“You don’t find those sorts of streaks near what have historically been tremendous buying opportunities,” hedge-fund manager Bill Fleckenstein yesterday said after the Dow rose 48.35 points to close at a record 13,312.97.

The Dow has rallied in all but three sessions since March 29 - a run not seen since July 1 to Aug. 2, 1927, just 26 months before 1929’s stock-market crash.

Although experts don’t see a 1929-style collapse coming, some think the Dow is setting up for at least a short-term correction.

Then there's this column comparing the market to Japan in the 1980s:

Editor Dennis Gartman wrote in the past week: "We stand in awe of the sheer majesty of this rise." But Gartman's response is to review what he wrote about an earlier unstoppable bull: the Japanese stock market of the late 1980s.

As Gartman remembers: "Shares there were running skyward even as the economies of the rest of the world were tanking. The Bubble was going "parabolic," and every modest decline was met with huge new buying, that soon took shares to incredible new highs as the Nikkei soared toward 40,000."

Gartman explains: "Already trading at incredibly over-bought levels when it had risen from 4,000 in late '75 to 8,000 by the mid-'80s, in reality the rally had only just begun! From '83-'85, the Nikkei rose 8,000 to 18,000 ... and still the rally had only just begun! From '86-early '88, it rose from 18,000 to 28,000 ... and still the rally had only just begun, for in those last two years, the Nikkei moved from 28,000 to 40,000, with the last 7.000 points coming in the final weeks of '89!"

Personally, I think any comparison to a historical period can be a bit problematic. Each expansion is unique onto itself. They have their own set of variables. For example, the recent rise is very insulated -- meaning the market is reacting more and more to itself instead of the economy as a whole. There's a ton of liquidity from a variety of sources (corporate balance sheets, the yen carry-trade) that didn't exist in the same proportion in previous bull markets.

While we all try to make sense of things through comparison, it's also important to look at the unique factors of this market.