Charts

I must admit that although my main interest lies in fundamental analysis and investing, I would also like to learn the basics of technical analysis and charting, if only to become more versatile. Since my current level is that of an amateur, I wanted to share some very straightforward charts that are easy to understand. They are from a great blog entitled http://www.dshort.com, which is definitely worth reading regularly.

four-bears-extended-large1

The first chart gives  you an idea of where this bear market stands in relation to three previous significant downturns. As you can see, the current cyclical bear leg has lasted between 340 and 370 days, which makes it the shortest by over 110 days. Considering that we are in “the worst economic and financial downturn since 1930”, a rational investor should be open to the possibility of further downside.

sp-composite-real-regression-to-mean8The second chart, compiled using Robert Shiller data, shows the historic S&P regression to the trendline. As dshort says: “The peak in 2000 marked an unprecedented 154% overshooting of the trend, which is double the overshoot in 1929. The index has been above the trend for 17 years. We also see that the major troughs saw declines in excess of 50% below the trend. If the S&P 500 were sitting squarely on the regression, it would be hovering around 820. If the index should decline over the next 12 months to a level comparable to previous major bottoms, it would fall to the vicinity of 400-425”.

  unemployment-sp-composite-since-1948-large1The third chart examines the relationship between the S&P and Unemployment. Dshort provides another excellent explanation here: “Unemployment is a lagging indicator that moves inversely with equity prices (see chart). Note the increasing peaks in unemployment in 1971, 1975 and 1982. The inverse pattern becomes clearer when viewed against real (inflation-adjusted) S&P Composite, with its successively lower bear market bottoms. The mirror relationship seems to be repeating itself with the current and previous bear markets.” It seems as though unemployment has still not reached a peak; a sustained bull movement is not likely to begin in the near term.

sp-composite-10-year-annualized-real-rate-of-return2The last chart is much more positive for prospective investors. It shows 10 year annualized returns since 1880, as well as levels of incline and decline from different peaks to troughs. It’s interesting to note that the current level may still have downside risk relative to previous movements. However, as we approach the trough, investors should be aware that the following 10 years should yield satisfactory returns.

Whilst understanding and analysing these charts may not be classified as “technical analysis” in its most complex form, I still find it constructive and informative. I wouldn’t necessarily recommend basing investing decisions on them, but I wouldn’t neglect them either. Again, they help us with probable outcome ranges. At this stage, these ranges seem to point towards lower lows, although when (and if) this occurs is uncertain.

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~ by eboro on January 13, 2009.

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