How Far Can Stocks Fall?

With the Dow Jones Industrial Average hitting 5 year lows today, the burning question on everyone’s mind is, how far can stocks fall.

This is a perfect time to republish a post that I wrote in the middle of October titled DJIA: Does the Past Offer Hope?

Here is a very interesting chart published by Barclays Capital. They compare the current equity market movements to that of the “Panic of 1907.”

The similarities are striking. In 1907, the last leg lower in the Dow was the 37% decline that lasted from the second quarter to the fourth quarter. So far this year we have only seen a 34% decline from the August high of 11867 to the October low of 7882. Another 3 percent decline would bring the Dow down to 7475.

Click to Enlarge

Barclays Capital

Barclays Capital

The price action in the Dow in 1907 suggests that there could be one final push lower in equities before a long term bottom and when a rally does happen, it could be as much as 20 percent. Afterward, expect a long phase of consolidation. Back in 1907, there was a 15 year consolidation before the stock market picked up once again and we entered the Roaring 20s.

Here’s a chart of the Dow from 1900-2004 (click to enlarge)



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