Market Review: April 2009 Commentary

Bouncing Like A Dead Cat
As Jim Morrison sang, “People are strange” and not only when you’re a stranger, but when you’re an investor as well. How else to explain the gyrations in the sharemarkets of the world over the past month other than quirks of human behaviour?

We all know that markets are driven by fear and greed, but it is the extent of both and their impacts that still surprises. There also seems to be a third factor impacting on prices at the moment, which is some sort of combination of both fear and greed (and ego as well) in that those who have sustained big losses in particular stocks (or, indeed, in the market as a whole) are watching the strong price recoveries from “bottom levels” before bailing out completely – hence, sending the prices nosediving again.

These sorts of actions are keeping the overall market volatility incredibly high. Unfortunately, though, we have simply got used to sharemarket falls or rises of at least 2% in a day. Such movements (especially downwards) just did not occur in 2005 or 2006. However, as we noted in April 2007, they started occurring a few times in February and March 2007 and have increased in frequency as the months have progressed. Historically, our analysis shows that such falls seem to start occurring around 18 months prior to a large crash.

This was the case in the US in 1928 and 1929, it was the case in the US (and NZ) in 1986 and 1987 and indeed it occurred in many countries, particularly the US, in 1999 and 2000 (1999 is often remembered as a very strong year in the US sharemarket, when tech stocks rose alarmingly, but actually a majority of stocks fell in price during that year). In all of these cases, starting around 18 months prior to a large crash, there had been many daily stock price falls of 2% plus. Before that, again in all of these cases, the market would have suffered no more than one or two of these “shocks” in any six-month period.