Are we at the bottom yet?

Yesterday (March 2, 2009), the DOW dipped to a new low. It closed at 6,763.29, down 299.64 points or 4.24%, the lowest since 1997. The stocks traveled back in time for 12 years. “Are we at the bottom yet?” everyone keeps asking.

My answer is “no”, because, if history is of any indication, I find the chart comparing the four great bear markets at dshort.com may provide the answer. On the chart, we do not look at red line (the 1973 oil crisis recession) and the green line (the tech bubble recession in 2000) because we’re talking about depression. We only look at the grey line (GD I) and the blue line (GD II, the current depression). When I looked at the graph of these depressions, I found some striking similarities.

The chart below is a reproduction of the chart, with annotations added by me. I marked the corresponding highs and lows of GD I and GD II with the same circled number (but of their respective colors. One can find that the two curves are of quite similar shape, only that the GD II curve is stretched.

GD II similar to GD I but stretched
(Click on the chart to see a larger image)

The point 6 on the GD I curve is about 9.5 months after the depression started (the thin green vertical line). The corresponding point 6 on the GD II curve is where we are today, and it’s 16.8 months into the current depression. It took 34.2 months for GD I to bottom out. If we assume that our current depression is on a similar path to GD I (i.e., the GD II curve is of a similar shape to the GD I curve but stretched), we can extrapolate by proportion the duration from start to bottom out. By my calculation, it’s about 60.5 months, or just about five years.

In other words, the current depression GD II will bottom out in about October, 2012. GD I bottomed out at almost -90%. And if GD II is of the same severity as, if not greater than GD I, then the DOW could be at as low as 1347 points when it bottoms out in October, 2012. Oooh! Scary thoughts!

Of course only time will tell if this is true. Meanwhile, we can check whether our assumption (that the GD II curve is of a similar shape to the GD I curve but stretched) is true when more data become available as we falter further into the current depression.

Note: This post is a republish from Are we at the bottom yet? on wordpress and has been back-dated to refelct the original date of publish.