Well the Caveat Rally of 2009 (discussed in Issue #333) ended in October ’09 as the balance of bulls and bears evened out. Up until then it was hard to find anyone that was outright bullish. Almost all commentary and opinion had either a bearish slant or was mildly bullish but…
The range and variation of opinion has since widened. There are still plenty out there reminding us of huge debt issues and decreasing stimulus packages (which no one can deny), but no longer does everyone seem to ‘know’ the market will fall. As a trader this is of course disappointing as the latter situation makes profits easy to come by – as long you can listen, take a step back and then remain contrarian.
With the waters of opinion now being somewhat muddied it is harder to gain a clear directional view based on sentiment. So what to now? Well one - no doubt unexpected - positive for the stock market is actually the current predicament in Europe, at least from a historical precedent perspective. Listed below are 13 previous financial crises, including the current episode, dating back to 1970.
1. 1970 – Penn Central
The Penn Central Transportation Company was the largest bankruptcy in US history at the time.
2. 1974 – Franklin National Bank
At the time the collapse of the Franklin National Bank was the largest US Bank Failure in history.
3. 1982 – Penn Square
The Penn Square Bank was an energy sector focused commercial bank that failed in 1982 due to poor lending practices.
4. 1982 – Lombard-Wall
Lombard Wall, a government-securities firm files for bankruptcy
5. 1984 – Continental Illinois
The Continental Illinois National Bank became insolvent, but was considered too big to fail (sound familiar?). The crisis is blamed partially on Penn Square.
6. 1994 – Orange County
Orange County, a suburb of Los Angeles (where Disneyland is located for those not from the US), files for bankruptcy
7. 1994 – Mexican PesoT
he Mexican Peso crashed with the US coming to Mexico’s aid
8. 1997 – Asian Financial Crisis
Starting in Thailand, the crisis affected much of Asia and caused fears of a global crisis
9. 1998 – Russian Financial Crisis
The Russian Financial Crisis was reportedly caused by the Asian Financial Crisis
10. 1998 – Long-Term Capital Management:
A US Hedge fund which failed after the Asian and Russian financial crisis due to huge losses is a short period of time
11. 2005 – Refco
Refco a US Derivatives Broker – the largest on the CME at the time – goes into crisis over bad debt cover-up
12. 2008 – GFC
Still fresh in everyone’s memories, this involved the failure of Bear Sterns, Lehman Brothers, Fannie Mae and Freddie Mac; as well as the bailout of large institutions like Bank of America.
13. 2010 – Greek Financial Crisis
Triggered by high debt levels, Greece requires bailout from the EU/IMF. It has sparked concerns about Portugal, Ireland, Italy and Spain also.
Looking at the chart below, the only crisis that hasn’t coincided with a low or the beginning of further gains is the GFC.
Figure 1 – Financial Crisis – 1970 to Present
click to enlarge
With that in mind, there is the potential for further bad news to cause the number of bears to shoot higher again, which in turn would likely lead to future gains. Such a spike is worth keeping an eye out for.
Often the best way to measure sentiment is simply by reading/watching (skimming) as much financial media - ideally those that include opinions - as possible without getting too caught up in any one argument. Last, as we all have a bias one way or the other, most of the time, it is important to be aware of what your current bias is so that it is less likely to skew your analysis.