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Wednesday, February 6, 2008

Market Similarities Between 1998 and 2008

Bob Brinker would take calls about the stock market and discuss his views on Moneytalk back in 1998. Steve T, a "Guest Contributor" to David Korn's most recent newsletter, has shared an archived record of a conversation that Brinker had with a caller about the 1998 market correction which was very similar to the one that is occurring now -- both would definitely fit into the description of an "intermediate-term correction."

Even though this call was 10 years ago, Brinker's "Timing Model" has not substantially changed for 20 years. What Brinker says to this caller may offer some insight in how he actually views the current stock market activity.
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Here are excerpts from David Korn’s Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service. Copyright David Korn, L.L.C. 2008 http://david-korn.blogspot.com/
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All of the following is posted with David Korn's permission from his February 2-3, 2008 Newsletter:
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(Guest Contributor) Steve T. comments on Brinker's Timing Model Indicators: As I see it, Bob Brinker would interpret his model with three our of four indicators in the bullish camp. I don't think Bob will turn bearish yet, but like many of you perhaps, I am sure he is watching and listening to the data very closely as it becomes available. Many of us have been worried that this decline of over 10% will turn into a full blown bear market. Based on what I see of his model, I don't think the time is yet upon us.
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I would like to leave you with an interesting call to Moneytalk from years back which is relevant to today's market action. During the heydays of Moneytalk, before the QQQQ debacle, Bob used to talk in depth about the market and his model. Back then, I used to follow his show very carefully and I had kept a summary of a caller to the show back in March 1998. During that show, Bob had a question about asset allocation from a 55-year old caller that was 100% invested in equities. Bob advised the caller to reduce his equity exposure to 80% and move 20% into fixed income. The rest of the call was very interesting as it brought up the issue of intermediate corrections and I thought David's subscribers would enjoy reading it, so here it is:
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CALL TO MONEYTALK MARCH 1998
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BRINKER: I would be willing to stay at your age of 55 still at a very aggressive 80/20. After making that adjustment, which I would make at current strength. Then I would say what I would do is take the following approach. I'd take that approach that I am going to go 60/50 if we get a final top in the bull.
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CALLER: I see.
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BRINKER: Or even if we get the likelihood of a major intermediate correction. Now we've talked about this many times. There are three types of pull backs in the markets. And this is always true. You can get a short term pull back, which is generally 10% or less. And by the way as measured by the New York Stock Exchange, even the last pullback was only 9.9%. So you can get a short-term pull back generally about 10% or less. That usually in a bull market is always a buying opportunity. And we've had many of those over this bull market. You can get an intermediate term correction,which is defined as a correction lasting let us say between several weeks and several months. That could be along the magnitude of let us say, let's put out numbers of less than 20% but more than 10%. So we call it over 10%, but less than 20% for an intermediate term correction. And then of course you can have the bear market which is generally speaking a decline of 20% or more. But a bear market can be a decline of 30%, or 40 or even more. So these are the scenarios you are looking at.
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Right now, I'd go from 100% stocks and 0% fixed income, to 80% stocks and 20% fixed income at your age and you no tax consequences in doing so. Use the GNMAs for the fixed income interest. Then I would watch the market and ignore short term corrections except to buy. If we had a bear market, I certainly would go, well if I went, if we had a bear market, that would result in a sell signal. Which could produce no equities. And if we had an intermediate correction, you might have to also consider going to no equities if it could lead to a bear. Unfortunately, with intermediate corrections, they usually infrequently. Let me put it this way. Let me see if I can be very specific about this. In almost every case a bear market is preceded by an intermediate correction. Let me repeat this, because I am sure that I am confusing somebody. As long as I am not confusing myself, I'm all right. In virtually every single case a bear market is proceeded by an intermediate correction. All I just said was virtually every time the market goes down over 20% in a bear market, it is preceded by a decline of over 10% but lessthan 20%.
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CALLER: Over what time period though?
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BRINKER: The over 10 but less than 20 could last several months, but the bear market can last six to 24 months.
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CALLER: Are you saying you might see this thing drop between 10 and 20% and then come back up?
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BRINKER: That is a possibility. You could have, see that's the problem with intermediate corrections. And thank heavens we haven't had any in this bull market. We haven't had to worry about it. But that's the problem with intermediate corrections. Once you get an intermediate sell signal, that tells you that the market, if the model works, the market will do down more than 10%. That at least, I have to be very specific here to be accurate. If you get an intermediate term sell signal that tells you that the market will go down more than 10% but less than 20%.
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CALLER: OK
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BRINKER: There's always the possibility that can come after the market is in the tank. That can then be followed by a bear market sell signal which would by definition be over 20%, so I generally follow the principal that if you get an intermediate term sell signal you go to cash. Or, if you hedge your portfolio to zero equities, in the United States I am talking about. In order to avoid the risk that you could roll over into a big bear.
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CALLER: I think you just covered the strategy that I as an unsophisticated investor would probably follow. That was being a subscriber if theintermediate correction seems to be at hand my strategy would be very simply to take everything in equity and go right to a money market.
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BRINKER: Yea money market or depending on the reason for the decline you might be able to go to a bond fund, also it depends on the reason for the decline. But yes a money market or Treasury funds of some sort would be the answer in that scenario. And I would agree with that.
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CALLER: And that scenario we're talking about that would not affect at all GNMAs?
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BRINKER: Well no. Only if we thought rates were going to go up. You know only if the cause was over heating economy. And right now that doesn'tappear to be a problem. Although it could change in the future. If everything turns out to be copasetic in Asia and the economy comes roaring back out of the gate then we have to worry about that but not for the moment. I am Bob Brinker and this is Moneytalk.* * * *
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DavidK EC: Very interesting call! You know that call was back in March 1998 and there are some similarities between now and that year. The S&P 500 was trading around 1100 in March 1998 and during that year the global currency markets went crazy and stock markets caved. We had Asian Contagion and then the bankruptcy of Long Term Capital Management. The S&P 500 underwent just shy of a 20% decline on a closing basis (but slightly more on an intra-day basis). Bob never adjusted his asset allocation, staying fully invested and claimed victory for his model since he claimed there technically was not a bear market in the S&P 500 on a closing basis. Back then, the Fed cut the Fed funds rate from 5.5% to 4.75% and the S&P 500 rocketed 39% over the next12 months. I provide that information for historical purposes only, not to make a prediction.
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David Korn’s Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service. Copyright David Korn, L.L.C. 2008 http://david-korn.blogspot.com/

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10 comments:

pig said...
This comment has been removed by a blog administrator.
Honeybee said...

Note to readers:

Regarding the comment deletions: I would like to assure you that I am not deleting any valid comments or opinions about Bob Brinker.

Please rest assured that the reason I have to delete anything is because some Brinker-supporters who cannot intelligently write about Bob Brinker are copying posts and using imposter ID's to mimic people here in an attempt to shut down valid and interesting replies.

If you read anything here that sounds like the raving of a madman, please know that I will be deleting it ASAP.

These Brinker-supporters are of the opinion that if they harrass me long enough, I will shut down the comments section of my Blog. This type of "censorship" is nothing new to me...

korky said...
This comment has been removed by a blog administrator.
Pig said...

(identity ID F2M6XB33Z10)

Ms Honey posted:
"the reason I have to delete anything is because some Brinker-supporters who cannot intelligently write about Bob Brinker are copying posts and using imposter ID's to mimic people here in an attempt to shut down valid and interesting replies."

(((ROAR)))

I wonder which imp is doing it? Nope......NOONE can make this stuff up..

Pig said...

(identity ID F2M32XB6tZ10)


Oh my, korky, you just can't control yourself, with your BORRRRRING imping. Not that it surprises me..

Honeybee said...

Pig (identity ID F2M6XB33Z10),

Yes, trying to figure out who is the impersonator is a stumper, alright, but I suspect that butter wouldn't melt in his mouth.

pig said...
This comment has been removed by a blog administrator.
Honeybee said...

Pig ID#(identity ID F2M6XB33Z10)

Good job...thanks!

Yes, it's nice to have a little help from one's friends. 8^)

pig said...
This comment has been removed by a blog administrator.
jumpnjoey said...

S&P 500 closed at the same price it was on 26 Sep 06. 16 months worth of gains - bye bye.