Market Decline Analysis — Full Breakdown & Transcript

[00:00] Welcome to Market View with Ike Iosif and Frank. This show that not only reveals and analyzes the insight story on today's market news, but also uncovers the areas where investors can make money right now.

[00:22] What's my good evening? Mike, I want to be your host for my next guest. I'm going to be talking to Mr. Peter Lyon. Hi, Peter. Happy New Year. How are you? Thank you, Mike. I'm doing fine. Thank you. How about you? I'm doing well. And Peter, I was really looking forward to speaking with you today because

[00:38] there's an extensive study on two things that occurred last week. One was, by the end of it, we have had the market down 8.5%. Very rare. In fact, I think this is the

[00:52] second worst showing the last 90 years the absolute worst showing was in December of 1931 when the market was down 14.5%. You've got to clarify that. That's not necessarily because I did not check in

[01:08] all of each and every individual year. The quarterly thing was for a quarter within a midterm presidential election cycle. It may be true beyond that. I don't know. But the reason it was

[01:21] so spectacular this time around is that that mid-term presidential election cycle that would correspond to this past year, 2018, 2014, 2010, 2006, 2002, whatever, going back

[01:37] four years at a time, those have almost without fail shown spectacular last quarters. I talk about that in the newsletter. And that's the thing that distinguished it so much and made such a big difference to me is that it was occurring within that mid-term year of the presidential cycle.

[01:57] performance of the market was so out of character, which in itself gives a very powerful message. However, on Monday, January 7th, we got another signal, which tends to be very bullish, and

[02:14] we got a Dwight Red Cross. So how do you reconcile the two? Well, I attempt to reconcile the two by, again, going back and looking at history. and in this particular case it's interesting because I heard about the flag red flag last week

[02:33] right after it occurred and I said oh my goodness I mean I had not done a lot of work with that before but I had done some work with it and to hear that it had given a red flag which is generally

[02:47] a very bullish thing at least that's what people would have you believe that they talked about the that's right, was a little disconcerting to me. And so I was just getting ready to do some research on it,

[03:00] and as it turned out, my friend Tom McClellan had already done the research, and he actually did what I would have done. He used the historical going all the way back into the late 20s and early 30s.

[03:18] That's what I would have done because I would have said, okay, I can see because the Dwight Brett threats, there was one in 2015, in 2013, 2009.

[03:30] There wasn't one for a long time between 1984 and 2009. But when they were given, they all tended to be not only short-term, media-term bullish, but most of them I think the good majority of them turned out to be longer bullish also So the big question in my mind was can we go back into the period which I think might be most closely aligned

[03:54] to the current time period, and that's the late 20s, early 30s. And when we did that, I started doing the research, as I said, and I looked online because I wanted to make sure I had the parameters right.

[04:06] And as I looked up the parameters, I came upon, hey, which Tom McClellan had done himself about two and a half years ago in 2015 when the last breadthrust signal was given.

[04:19] And sure enough, Tom had gone back into the late 20s and early 30s, and he found out there were all kinds of bad signals given. When I say bad, I mean a breadthrust signal,

[04:32] according to this white definition, was given, and they led to nothing. In fact, a couple of them led to immediate declines of significance. So that's the one thing I was looking for to disprove the long-term efficacy of this indicator.

[04:51] I didn't want to just the indicator and make anything bad about it. I just wanted to say, because with my experience with long-term history in the markets, I want to go back and look at these things over time, like not just the last 10 or 20 or even the last 30 or 40 years,

[05:06] if I have the data, I want to go back and look at the data as far back as I can go. And I do have the data going back to the 20s. So, as I said, I started to look, and Thomas Vaughn had done it,

[05:18] and sure enough, he reached the conclusion that he said out of, I forget what the numbers were now, but out of like 21 bread trusts in the last 80 years or so,

[05:31] 11 of them or 10 of them worked out really well, and 10 or 11 of them did not work out so well. So it's almost a 50-50 proposition long term. Now, when it was first called to my attention a week ago,

[05:45] a gentleman by the name of Rob Hanna, who has a very interesting service, I don't know if you've seen any of his stuff, like it's called Quantifiable Edges. I want to give him an attribution because he has a good site and he's the one who first called it to my attention, as I said,

[06:00] talked about the bread thrust going back to 71. and every single one of them, he made the assumption that you buy on the day of the bread trust and sell 20 days later.

[06:12] Well, there's an average of 21 trading days in a month. So for all practical purposes, he's buying on the day of the bread trust and selling a month later. And here's what's happened. Let me read you the results of the last eight trades

[06:26] starting in 71. Mind you, just for one month, up 4.8%, up 7.8%, up 8.9%, up 8.4%, up 2.7%, up 8.9%, up 3.1%, and up 4.3%.

[06:42] That's the kind of success you can't argue with. And that's why it troubled me a little bit that we were looking in the face of a bread trust that didn't seem to have any bad signals for the last almost 50 years.

[06:56] Of course, the trick is that it was only 50 years, and that if you look back to that time zone that I think might be staring us in the face, like the late 20s, early 30s, it did not work anywhere nearly as well back then.

[07:12] Well, Peter, given what has passed by then, what are your expectations for the program? You know sometimes I afraid that I overly influenced by the fact that some of the best valuation metrics that I look at and I believe perhaps the best valuation metrics out there are the ones that are done by John Hussman of Hussman Economic Metrics I agree And by his evaluation metrics at the recent highs in the market we were every bit as

[07:45] overvalued, if not more overvalued, than we were in both 1929 and in 2000. and I think most of us will say that in our experience because 29 led to around a 90% decline in the broad averages

[08:01] and 2000 led to around a 90% decline in the NASDAQ that those were the two greatest over-evaluations not only in our lifetime, beyond most of our lifetimes

[08:13] and going back for almost the last 100 years now. So those are the kind of things we have to pay attention to in terms of valuation. And because we are where we are valuation-wise,

[08:27] I have a tendency to treat more lightly anyone's historical appraisal of things like threat threats or anything like that

[08:39] to tell me how great the market's going to be for the next year at least, if not longer than that. Here's one for you. I just remembered this from the other day.

[08:51] There's a very talented market analyst I love to read, a stuff called Dana Lyons, L-Y-O-N-S. He did a study last year right around this time

[09:03] and found that, I can't give you the exact numbers, so I'm not going to attempt to give you the exact numbers. This study had been done before, by the way, in a lot of different ways,

[09:15] but Lyons did it with very strict parameters and found out that, I forget how far back he went, that if the first five days of the S&P are up more than 2.3% or 2.5%

[09:31] for five trading days of the new year, that it happened before January 17th, as he wrote about it in January 17th, That had happened on 23 prior occasions in the market since 1950, I think it was.

[09:48] And on every single occasion, the S&P was up for the year. Now, on some of the occasions, remember, if you're up 2.3% after five trading days,

[10:00] does that mean that you're up from that point for the rest of the year? Or do you go back to December 31st again? Well, for this statistic, he went back to just now the 31st and said, okay, the first five trading days were up more than, I'm guessing, 2.3%.

[10:16] On every single occasion since 1950, the S&P was up for the year. Except for when? Just when, Ike? Because I can't think. You got it, baby.

[10:28] So there were things like that that are harmless. Wait a minute. I mean, these could be coincidences. Let's face it. We have to face that possibility. These things are not written in stone.

[10:40] There's no written law. The market says if something happens for 23 years and then doesn't happen in one year, that's very significant and the market's going to fall apart. No, we don't have those written in stone rules, but we sure should pay attention to them.

[10:57] And because that happened at the same time, within days of when we saw for the worst last quarter of the midterm election year and the worst December of any year within the first or second historically worst in history to see that happen again you have to question in terms of whether the market really is trying to tell us something

[11:23] Is it really trying to tell us that something different is happening this time around? That this is not your typical, oh, every time for the last 25 or 30 or 40 or even 50 years

[11:35] that this has happened, it's been bullish, so it's going to be bullish this year. we have to question whether perhaps these very singular occasions, almost unique things that have happened in the market in the last three to four months may perhaps be trying to tell us something.

[11:51] Well Peter, anything else you want to add in on the topic of the breakouts? Yeah, the trading index is getting to be interesting, Jen, because the 10-day trading index, although we did get to a reading in the 10-day ice that was substantiating a bottom in a bull market with a 130 reading.

[12:09] I think the highest reading while I'm talking to you I'm going to be going to my trend spreadsheet and looking at the highest 10 day reading that we had

[12:21] and it looks to be a 134 reading on January 3rd so that was January 3rd it was 1, 2, 3, 4, 5 days after the low occurred

[12:35] there was a 132 reading on December 24th. But with the kind of market decline that we saw and the fact that we're well under the 200-day moving average and you could argue that we're in a bear market,

[12:49] usually in bear markets, the capitulation for a 10-day trend reading might just be 150 or higher. At least it's been that way for the last several decades.

[13:01] So we never got that kind of reading. And so for me, I don't think we ever got true capitulation. In terms of people throwing their arms up and saying, okay, get me out. Sell my spot.

[13:13] I don't care what price you get for them. Get me out. We didn't see that kind of capitulation. And one would have thought it was the kind of decline that we had that we might have seen that kind of capitulation. And I still think there's an excellent chance we will.

[13:27] because I think the odds of our testing that bottom within the next six to eight weeks are almost 85 to 95 percent. I think they're that high. And I also think that if we do that, that we're going to get meetings that are going to be

[13:44] the 10-day training meetings are going to be either at 150 or very close to it. The only other thought that I have is, as usual, or as has become my wonk in the past year or two, I'd like to remind all of you listeners that they are able to get my latest updates if they go to my website at stockmarketcyclist.com.

[14:05] The last one is actually a special before I, that I wrote just a few days after the one that I wrote at the end of December. So there's some interesting stuff in there. I think people will enjoy it. No, actually, both the one at the end of December and the latest one were absolutely spectacular.

[14:22] I highly encourage people to get in with them. Thank you, Matthew. Appreciate that. Thank you. Have a great day. My pleasure. Have a great day and a great New Year. Thank you, too. Thank you.

[14:45] Thank you.