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September 11, 2005

Another Major Autumn Stock Market Decline for 2005?
by Robert McHugh

It is surreal that this analysis comes along on the fourth anniversary of one of the top five domestic tragedies in all of U.S. history, as well as on the heels of a second "top five" catastrophe in U.S. history, the Great Gulf Flood. But the charts are what they are, and the seasonal tendencies speak for themselves. Okay, here we are, in September 2005, and guess what? The price action in the Dow Industrials in 2005 has been nearly identical to the price action of 1987. The difference is, the 2005 action is about one month ahead of the 1987 price action. If this analog holds up, the Dow Industrials are set up to crash.

What is striking here is the timing of turns. Every up and down move is occurring within days of each other going back to January. The rallies occur together, as do the declines. Even the slopes of ascension and descent are nearly parallel. If this continues, the downside target for the Dow Industrials is close to 8,000. Analogs don't have to hold up, but often they do. History does repeat itself - often. No guarantees, of course, but wow.

Last week we presented a couple of charts that showed how autumn is not a friendly seasonal period for equities. We showed that for the past eight years in a row, equities have declined sharply in autumn. Five of those declines were crashes, and a sixth just missed hitting our definition by a few percentage points. Since we have entered that risky season, we thought we'd show those charts again this weekend. However, in addition to that data from 1997 through 2004, we went back and checked out what happened the eleven years prior, from 1986 through 1996. Here's how the autumn season shook out during those years:

1986: The Dow Industrials hit a high of 1,933.35 on September 5th, then fell 10.36 percent over 16 trading days to 1,732.99 on September 29th.

1987: A stock market crash that began on August 25th at 2,746.65, and fell for 39 trading days to a low of 1,616.21 on October 20th, a 41.2 percent wipeout. The worst of the crash occurred from a high of 2,668.32 on October 2nd to 1,616.21 on October 20th, a 39.4 percent plunge in just 12 trading days.

1988: No autumn decline - possibly because it was a Presidential election year, and the incumbent party was to remain in power.

1989: The DJIA topped at 2,809.08 on October 10th, then fell 11.12 percent over the next four trading days to 2,496.93 on October 16th.

1990: A stock market crash that began on July 17th at 3,024.26 and declined over 61 trading days to 2,344.31 on October 11th, a 22.5 percent plunge. The September/October phase of this tanking was a 12.0 percent decline over 23 trading days from 2,665.35 on September 10th to 2,334.31 on October 11th.

1991: A small decline (relative to most autumn sell-offs), the Dow Industrials fell 4.64 percent over 26 trading days from August 29th's 3,068.65 to October 7th's 2,926.21.

1992: Even though it was a Presidential election year, the Dow Industrials gave a hint that the incumbent was about to get axed, dropping 8.96 percent over 15 trading days, from 3,391.35 on September 14th to 3,087.41 on October 5th.

1993: A small decline, the DJIA losing 3.36 percent over 31 trading days, from 3,674.17 on August 25th to 3,550.37 on October 8th. Call it Flat.

1994: A 5.95 percent decline as the Dow Industrial fell from 3,972.72 on September 19th to 3,736.20 on October 5th, a 12 trading day span.

1995: While the figure isn't a headline, the DJIA fell 4.15 percent over 17 trading days from 4,839.48 on September 15th to 4,638.43 on October 10th.

1996: No autumn decline. Another Presidential election year, and the equity market clued us in that the incumbent would be back.

Now for the most recent eight year series of unfortunate events:

1997: A stock market crash that began on August 7th at 8,340.14 and fell for 57 days to a low of 6,936.45 on October 28th, a 1,403.69 drop, or 16.8 percent.

1998: A stock market crash that began on July 17th at 9,412.64 and fell for 32 trading days to a low of 7,329.70 on September 1st, a 2,032.94 plunge, or 21.6 percent. It hung around that low through October 8th, hitting a bottom that day at 7,399.78.

1999: A near-crash that began on August 25th at 11,428.94 and lasted through October 15th when it fell to 9,911.42, 36 trading days, a 13.2 percent sell-off.

2000: Another stock market crash, this one commencing September 6th at 11,401.19 and lasting until October 18th's 9,656.12 bottom, a 30 trading day plunge that saw prices fall 1,745.07 points, or 15.3 percent.

2001: Again, a stock market crash. It began on August 27th at 10,441.37 and lasted through September 21st, bottoming at 8,062.34, a 2,379.03, 22.7 percent bloodbath that took only 14 trading days.

2002: Again, the sixth stock market crash in a row if you consider the 13.2 percent 1999 wipeout a crash. It started innocently enough on August 22nd, at 9,077.01, and lasted until October 10th at 7,197.49. When the carnage was over, the losses were 1,879.52 points, or 20.7 percent.

2003: Even in 2003, when a glorious rally was in full swing, the Dow paused to follow tradition by dropping a measurable 4.7 percent, or 455.61 points from 9,686.08 on September 19th to 9,230.47 on September 30th.

2004: A significant 6.2 percent drop followed suit, markets in the tank from September 13th's 10,348.39 high to October 25th's 9,708.40 low, a 639.99 sell-off.

Of the past eight years' declines, Five of the eight were stock market crashes, with declines greater than 15 percent, and a sixth was nearly a crash, plunging 13.2 percent! The smallest decline was still a significant 4.7 percent.

The declines typically started in the July/August period and lasted into the September/October period. Seven of the eight were declining over the autumn equinox, and all eight declined during the month of September.

Maybe 2005 will be different, but there is no Presidential election, so we must remain alert.

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"Nevertheless knowing that a man is not justified
by the works of the Law, but through faith in Christ Jesus,
even we have believed in Christ Jesus, that we may be justified by
faith in Christ, and not by the works of the Law;
since by the works of the Law shall no flesh be justified."
Galatians 2:16

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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