Here's an update from Serge Perreault, a Chartered Accountant and market technician located near Montreal, Canada. Serge anticipated the S&P 500 pullback and has nicely annotated its progress in a series of posts:

The S&P 500 is up 0.9% from last Friday. Serge's latest chart shows the index moving upward toward the resistance level, and the Rate of Change indicator (ROC) is also pressing upward to resistance. It's Friday, and there are no bank failures. Are these clues of a reversal?

Here's a chart on option ARM recasts from a CalculatedRisk article posted last month. I've received several requests to reproduce it with an overlay the S&P 500 — the latest in an email this morning. So here it is.

My tardiness in getting around to this overlay is that, although the apparent correlation is interesting, I doubt it has any major significance.

CalculatedRisk questions the size of the payment shock. As he points out, the Amherst Securities report suggests many payments will double, but other estimates are much lower. Nevertheless, the overlay may suggest some potential headwinds over the next 18 months or so.

This latest update shows some recovery of the diversification effect in the equity classes, although the most conspicuous equity variance is the relative underperformance of the REIT index.

This latest update shows some recovery of the diversification effect in the equity classes, although the most conspicuous is the relative underperformance of the REIT index.

How do we protect against these infrequent but destructive events? First we need to understand that they do happen — a reality this website has tried to illustrate over the past two years. Followers of buy-and-hold investing need to balance risky assets with an appropriate, age-adjusted ratio of fixed-income assets in their portfolios. This will help to minimize the chance that a market implosion near or in retirement is a life-changer.

Another approach is to employ a tactical asset allocation strategy that attempts to reduce equity holdings when the market appears significantly overvalued or when it is trending down. Both of these conditions, market valuation and moving averages, are periodically addressed at this website.

Now that the Dow is playing peek-a-boo with the 10,000 level, I was interesting in plotting the index against this memorable benchmark.

The Dow first broke the 10,000 level in March 1999. Since that time the daily close has crisscrossed that number 57 times in nearly eleven years.

The Yahoo! Finance daily data for the Nikkei 225 only goes back to January 1984. Since that date the index daily close has crisscrossed the 10,000 level 48 times in 26 years.

Where do these two indexes go from here? If only Excel had a crystal ball indicator!

A regular monthly feature of this website is a chart overlay of monthly unemployment and the S&P 500 since 1948, the year Uncle Sam began tracking labor statistics. A fascinating chart at CalculatedRisk examines the data since 1969 on the unemployed for more than 26 weeks (see chart). This prompted me to overlay the same data since 1948 on the S& P 500. Click on the thumbnail at right for a larger version. The implications for further market recovery aren't encouraging. I'll be adding this chart to my regular monthly unemployment updates.

As regular visitors to the website know, I keep an eye on monthly moving averages for potential buy/sell signals. Of course there are many momentum timing systems out there. The Ocean Portfolio blog is an interesting website that focuses on 4, 18 and 39-week moving averages for investment decisions — an interesting alternative for those who prefer to trade more frequently.

Serge's latest chart identifies a new support level around 1029, the vicinity of the low at the beginning of November. A decline to that level would constitute a correction of 10.5% — a near bull's eye (pun intended) for the classic 10% pullback.

Note: The latest Standard & Poor's earnings spreadsheet (February 3) puts the annualized dividend yield at 2.03% and the indicated rate at 1.99% (The indicated dividend is the estimate for the next four quarters, based on what was paid in the most recent period).

What happened? Investors shifted their focus from income streams to price appreciation. As a first-wave Baby Boomer, I see this shift as a result of three things:

A New Investor Class

The 401(k) plan was introduced in 1980. The following year the Economic Recovery Tax Act permitted all employees, in addition to those not covered by an employee retirement plan, to contribute to an IRA. The result has been the massive growth of a new investor class with a limited understanding of markets and risk. The bulge of Boomers became a windfall for Wall Street (the oldest having just turned 35 in 1981).

The popularity of tax-deferred savings vehicles reduced the appeal of dividend income. The goal of retirement savings is to grow the nest egg. Thus, the distinction between dividend yield and price appreciation quickly lost relevance. New companies saw little need to pay dividends. Many existing companies reduced their dividends and redirected those earnings to corporate growth (not to mention executive compensation). More...

The monthly unemployment rate for January fell to 9.7% — down from 10% in December. The peak for the current cycle was 10.2% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.

Unemployment is usually a lagging indicator that moves inversely with equity prices (see chart). Note the increasing peaks in unemployment in 1971, 1975 and 1982. The inverse pattern becomes clearer when viewed against real (inflation-adjusted) S&P Composite, with its successively lower bear market bottoms. The mirror relationship seems to be repeating itself with the current and previous bear markets.

The second chart is one of my favorites from CalculatedRisk. It shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

The start date of 1948 was determined by the earliest monthly unemployment figures collected by the Bureau of Labor Statistics. The best source for the historic data is the Federal Reserve Bank of St. Louis.

As regular visitors to this website know, I've been a frequent contributor to the Motley Fool Rule Your Retirement subscription service, and I routinely "stroll" the RYR discussion boards as TMFDoug.

Like many blogs, my dshort.com website has context-sensitive ads controlled by third parties. Rule Your Retirement is the exception. It has my full endorsement. If retirement planning is a topic you want to know more about, consider a 30-day free trial.

About the only certainty in the stock market is that, over the long haul, overperformance turns into underperformance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis to the question.

Here's a chart of the S&P Composite stretching back to 1871. The chart shows real (inflation-adjusted) monthly averages of daily closes. We're using a semi-log scale to equalize vertical distances for the same percentage change regardless of the index price range. The regression trendline drawn through the data clarifies the secular pattern of variance from the trend — those multi-year periods when the market trades above and below trend.

Today's S&P 500 close moved us further above the support level that technical analyst Serge Perreault discussed in this item posted over the weekend. Volume, however, remains weaker than last week's selloff. Check out this chart to see what I mean.

An email just in from Serge points out that "The biggest test remains the 50 day moving average. Indeed, if you notice, on my week-end graph, the 10MA is at the same level as the 'Downtrend Resistance' dating back to 2007."

Note: The chart linked from the thumbnail above is a live chart, so the little version won't match after the next market open. Perhaps that will be a good thing.

Here's a new update of our preferred market valuation method using the latest Standard & Poor's earnings estimates and the index monthly averages of daily closes through January 2010.

The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's website, where the latest numbers are posted on the earnings page. Click on the Index Earnings link in the right hand column. Free registration is now required to access the data. Once you've downloaded the spreadsheet, see the data in column D.

The table here shows the TTM earnings based on "as reported" earnings and a combination of "as reported" earnings and Standard & Poor's estimates for "as reported" earnings for the next few quarters. The values for the months between are linear interpolations from the quarterly numbers.

The average P/E ratio since the 1870's has been about 15. But the disconnect between price and TTM earnings during much of 2009 was so extreme that the P/E ratio was in triple digits — as high as 122 — in the Spring of 2009. At the top of the Tech Bubble in 2000, the conventional P/E ratio was a mere 30. It peaked north of 47 two years after the market topped out.

As these examples illustrate, in times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of 2008 Q4 (-$23.25) is something that has never happened before in the history of the S&P 500.

The P/E10 Ratio
Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by the 10-year average of earnings, which we'll call the P/E10. In recent years, Yale professor Robert Shiller, the author of Irrational Exuberance, has reintroduced the P/E10 to a wider audience of investors. As the accompanying chart illustrates, this ratio closely tracks the real (inflation-adjusted) price of the S&P Composite. The historic P/E10 average is 16.3.

The Current P/E10
After dropping to 13.4 in March 2009, the P/E10 has rebounded above 20. The chart below gives us a historical context for these numbers. The ratio in this chart is doubly smoothed (10-year average of earnings and monthly averages of daily closing prices). Thus the fluctuations during the month aren't especially relevant (e.g., the difference between the monthly average and monthly close P/E10).

Of course, the historic P/E10 has never flat-lined on the average. On the contrary, over the long haul it swings dramatically between the over- and under-valued ranges. If we look at the major peaks and troughs in the P/E10, we see that the high during the Tech Bubble was the all-time high of 44 in December 1999. The 1929 high of 32 comes in at a distant second. The secular bottoms in 1921, 1932, 1942 and 1982 saw P/E10 ratios in the single digits.

Where does the current valuation put us?
For a more precise view of how today's P/E10 relates to the past, our chart includes horizontal bands to divide the monthly valuations into quintiles — five groups, each with 20% of the total. Ratios in the top 20% suggest a highly overvalued market, the bottom 20% a highly undervalued market. What can we learn from this analysis? Over the past several months, the decline from the all-time P/E10 high dramatically accelerated toward value territory, with the ratio dropping from the 1st to the upper 4th quintile in March. The price rebound since March has now put the ratio at the top of the 2nd quintile — quite expensive!

A more cautionary observation is that every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 600. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E10 bottom? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now nearing its tenth year.

I received some feedback requesting that I not discontinue posting the 12-month moving average signals for The Ivy Portfolio ETFs. I may reconsider. Meanwhile, here are those 12-months SMA signals. A comparison with the 10-month Ivy SMAs shows the bond and commodity ETFs (DBF and IEF) swapping alerts.

Today's S&P 500 close got us back up above the 1085 support level that Serge Perreault discussed here over the weekend. However, today's gain was on significantly weaker volume than last week's selloff. Check out this chart to see what I mean.

Was March 9th 2009 the end of a secular bear market in the S&P 500, or is there more downside to come? Without crystal ball, we simply don't know.

One thing we can do is examine the past to broaden our sense of the range of possibilities. An obvious feature of this inflation-adjusted chart of the S&P Composite is the pattern of long-term alternations between up- and down-trends. Market historians call these "secular" bull and bear markets from the Latin word saeculum "long period of time" (in contrast to aeternus "eternal" — the type of bull market we fantasize about).

If we study the data underlying the chart, we can extract a number of interesting facts about these secular patterns: More...

Market timing with moving averages (aka tactical asset allocation) is a regular topic on this website. My initial posts on the subject focused on the historic record of monthly moving averages in the S&P 500. After the publication of The Ivy Portfolio, I began including timing updates for the five ETFs featured in that book.

To make the monthly signals more accessible, I've renamed a permanent link in the left column: Timing Signals (formerly Moving Averages). This item pairs with the Timing Updates link, which provides interim data between the monthly closes. Also, I'm discontinuing the Ivy Portfolio Charts link in deference to charts now posted at Mebane Faber's World Beta website.

Finally, I want to alert readers to the Tactical Asset Allocation for the Masses blog. This is a useful resource for anyone seeking an application of the Ivy Portfolio timing strategy to additional ETFs. The TAA website also features updates on sector and asset-class rotation.

Tactical asset allocation with moving averages has been around for decades, but its suitability for the individual investor is heavily dependent on many factors — investment goals, personal discipline, risk tolerance, tax implications, and transaction costs, to name just a few. My periodic focus on this topic should not be taken as a general recommendation.

Here's the latest weekend update from Serge Perreault, a Chartered Accountant and market technician located near Montreal, Canada. Serge anticipated the correction in the S&P 500 in his last post from a week ago, which included a couple of downside targets: -3.3% and -5.7%. The index is now 6.6% off its interim high. Thus it has fallen below the technical support level (A on the chart), which was around 1085.

Serge's latest chart updates his weekly view and highlights the downtrend support and resistance from the market peak in October 2007. Now that the index has broken support, the apparent uptrend that Serge annotated last week (the B line in the chart), appears to be an up-cycle within the larger downtrend.

In the email accompanying the chart, Serge explained the difference between trends and cycles:

In technical analysis, there are three types of movements: uptrends, downtrends and "no-trend" sideways movements. I refer to up and down movements within a trend as "cycles." This explains my description of the S&P 500 as being in an up-cycle within a downtrend.

The italicized tease is the title of an article I posted a year ago on the January performances in all the years with negative returns since 1871. Earlier this month, a similarly titled WSJ article provided a more elaborate study of the Dow data since 1900. Particularly interesting is an accompanying graphic comparing the Dow median gain for the year since 1900 when January is up (+10.4%) and when it's down (+0.3%).

I originally posted this item when the January S&P 500 had slumped -1.6% with two trading days left in the month. The final January close was down over double that amount at -3.7%. Should we expect 2010 to close lower? Let's examine the S&P data since 1928. The accompanying table uses a color scheme to highlight the correlation between Januarys and year-end performances. About 73% of the time there is a correlation, with 60 of the 82 Januarys matching the direction of the year. Note: I lump 1947, when the index finished flat, as a down year and hence a mismatch for the January 1947 gains.

The average index gain in years with a positive January close is 12.9%. In negative January years the index has averaged -2.8%.

There seems to be a pattern here, but the extreme outlyers make these stats more a curiosity than a "take action" indicator. Last January the index lost 6.1% but closed the year up 23.5%. Similar upside mismatches occurred in 1928 and 2003. On the other hand, check out the extreme negative annual returns in the January up years of 1929, 1930, 1931 and 1937.

The S&P 500 closed the month of January 3.7% below the December close. However, all three of the S&P 500 monthly moving averages we've been tracking continue to favor equities.

Since 1950 the S&P 500 10-month SMA has had 41 buy signals; 26 of them (63.4%) led to a gain before the next sell signal, 15 of them (36.6%) led to a loss. The 12-month SMA has had 31 buy signals, 21 (67.7%) led to a gain before the next sell signal, 10 (32.3%) led to a loss. These moving-average signals have a good track record for long-term gains while avoiding major losses. But they're not fool-proof.

Here is a table with the current signal for the 10-month SMA for the five ETFs featured in The Ivy Portfolio.

Buying and selling based on a moving average of monthly closes can be an effective strategy for managing the risk of severe loss from major bear markets. In essence, when the monthly close of the index is above the moving average value, you hold the index. When the index closes below, you move to cash. The disadvantage is that it never gets you out at the precise top or back in at the very bottom. Also, it can produce the occasional whipsaw (short-term buy or sell signal). More...

Earlier this month I announced the latest Rule Your Retirement newsletter, which appropriately kicked off the new year with four steps and a monthly checklist for improving your fiscal fitness.

The video below is a pop quiz for retirement readiness. Watch it, monitor your reaction, and then continue reading below:

If you found yourself nodding in agreement, then you should already have a sound retirement plan in place. That means knowing

Good financial planning doesn't happen overnight, but you can take advantage of a 30-day free trial of Rule Your Retirement that will give you access to a realistic regimen for fiscal fitness. And it's never too soon to start. As of today, we're already eight-percent of the way through 2010. That's right, eight percent! Time waits for no one.

Here's a weekend update from Serge Perreault, a Chartered Accountant and market technician located near Montreal, Canada. Serge anticipated the correction in the S&P 500 in this previous post from January 19th, which included a couple of targets: -3.3% and -5.7%. At the end of the week the index had declined 5.1%.

The earlier chart annotated the uptrend support from the S&P 500 low in March 2009. Serge's new chart switches to a weekly view and highlights the downtrend support and resistance from the index peak in October 2007.

We have a bit of suspense going into today's S&P 500 end-of-week open. Thus far a two-day correction has dropped the index to the vicinity of the 50-day simple moving average. During the past five months the index has twice before corrected to this area. The first time was a text-book bounce off the MA indicator. The second saw a tough tussle out between the two before the index emerged victorious.

What will be the case with this corrction? We've yet to see a classic 10% retracement since the market's meteoric rise began last year. This is earning season — a time of uncertainty and occasional drama. And today is Friday.

The Rule Your Retirement mid-month update, just released, features the quarterly issue of Champion Funds. In it you'll find:

As regular visitors to this website know, I've been a frequent contributor to Rule Your Retirement, and I routinely "stroll" the RYR discussion boards as TMFDoug.

Like many blogs, my dshort.com website has context-sensitive ads controlled by a third party. Rule Your Retirement is the exception. It has my full endorsement. If retirement planning is a topic you want to know more about, consider a 30-day free trial.

Here's another technical commentary from Serge Perreault, a Chartered Accountant located near Montreal, Canada. Serge has some thoughts on the continuing uptrend and prospects for a correction. He's analyzed the performance of the S&P 500 since the March 2009 low in a chart with attention to trends in price, volume, relative strength, and rate of change.

Serge notes the divergence in volume and momentum and a potentially overbought condition, and he estimates some possible targets for correction.

Here's a sobering set of charts that will especially resonate with those of us who follow economic cycles.

Imagine that ten years ago you invested $10,000 in the S&P 500. How much would it be worth today, adjusted for inflation with dividends reinvested? Brace yourself: Your investment has shrunk to about $7,246, an annualized return of -3.17%. That's a 27.5% loss.

And this is an improvement over the same ten-year return as of March, when your annualized return would have been -5.93%, for a total loss of 45.7%.

Now let's imagine that we time-travel back to September 2000 and pose the same question. Your ten-year inflation-adjusted gain would have been 396% for an annualized return of 16.13%. As the chart illustrates, investment performance with a 10-year timeline has been a real roller coaster as far back as we have data.

If we extend our investment horizon to 20 years, the roller coaster is less volatile with higher lows and lower highs. The volatility decreases further with a 30-year timeline. But even for that three-decade investment, the annualized returns since the 1901 have ranged from less than 2% to over 11%.

As these charts illustrate, and as many households have discovered over the past two years, investing in equities carries risk. Households approaching retirement should understand this risk and make rational decisions about fixed income alternatives for that part of the nest egg that will pay non-discretionary expenses not covered by Social Security and pensions.

Here's a new chart that gives a closer view of the cyclical rallies and their duration during Japan's secular bear market, now in its 20th year.

I've been posting a weekly updates of a mega-bear market charts (here and here) that includes Japan's Nikkei 225. In addition, every month or so I've update an inflation-adjusted overlay of the Nikkei 225 and S&P 500 bubbles.

The table below documents the Nikkei 225 advances and declines and the elapsed time for each.

For the sake of comparison, the S&P 500 interim high thus far is 69.8% above the low set in March 2009. I update this statistic each business day in this chart.

The latest Rule Your Retirement newsletter was published today, and it contains one of the finest financial planning regimens I've yet to encounter. RYR leader Robert Brokamp, a Certified Financial Planner, kicks off a new year of fiscal fitness with a 20-page special report that offers a month-by-month checklist of key topics for your financial focus. The heading for most months is self-explanatory, but I've added clues for a few:

The newsletter's Wealth Defense article, Find a Pro Who Works on Your Terms, asks the key question "Are You Being Advised or Sold?" If you could use some professional assistance with your finances, this article gives you the lowdown on what fiduciary responsibility means and how you go about getting advice from someone who puts your interests first, not their own.

The Asset Focus section takes a look at REITs, an especially controversial asset class in recent years. Do REITs belong in your portfolio? The article examines this conundrum.

Here is a series of real (inflation-adjusted) monthly close charts of the Nikkei 225 and the S&P 500 since 1970 with their respective annualized rates of inflation shown below. This series also includes an overlay chart with the two index peaks aligned. The overlay retains Japan's inflation to illustrate a point discussed later in this post.

The left sides of the two bubbles are remarkably similar. More conspicuous, however, are the dissimilar contours of the post-bubble declines. More...

I've occasionally featured technical commentary from Serge Perreault, a Chartered Accountant located near Montreal, Canada. Serge has some fascinating observations on the threshold of the new market year. His focus is the performance of the S&P 500 over the past three years in a chart that he shared with me over the weekend.

Serge reviews the technicals, observes the recent patterns of volume and momentum, and asks the inevitable question.

Because of a death in the family last week, I missed my usual announcement of the Rule Your Retirement mid-month update. But the latest one is too important to let slide. It raises a question that will be timely throughout 2010: Should You Convert to a Roth?

The update briefly touches on five reasons a 2010 Roth conversion might be right for you. And it lists six reasons why the conversion might not be in your best interest. Retirement planning has long been an interest of mine and no doubt contributed to my own early retirement in 2006. So it came as a bit of a surprise that the RYR update included a reason to avoid a Roth conversion that I was unfamiliar with.

If you're thinking about a Roth conversion next year, you should definitely click here to sign up for a free trial of the Motley Fool Rule Your Retirement subscription service. And check out the latest mid-month update.

As regular visitors to this website know, I'm a frequent contributor to Rule Your Retirement, and I routinely "stroll" the RYR discussion boards as TMFDoug.

This illustration to the right is a close-up of my Four Bad Bears chart. It shows the similar percentage decline from the previous high for three of our four bears about 26 months after that previous high.

The green line is the 2000 Tech Crash continuing to its ultimate bottom. The pink is the 1973 Oil Crisis bear in sustained recovery mode. Of course this comparison is merely a bit of charting trivia. Nevertheless, it will be interesting to see how our current market, the blue line, fares in the wake of this holiday season of traditionally excessive consumption. Fourth quarter earnings won't start the reporting process for a couple of months, and comps with last year's dismal sales will be a low target to beat.

I've occasionally featured technical commentary from Serge Perreault, a Chartered Accountant located near Montreal, Canada. Serge has some fascinating observations about the current performance of the S&P 500. Here's a chart he shared with me this weekend.

Serge explains that "the S&P 500 is now squeezed between its 10-week moving average and the resistance of a downtrend formation dating back to the October 2007 high...."

In the lead article of the latest Rule Your Retirement newsletter, published today, RYR leader Robert Brokamp, a Certified Financial Planner, asks the question "Could the U.S. stock market ever look like Japan's?" He posed the question to several experts:

In addition to the lead article, the newsletter's Wealth Defense section article, Roth Conversions for Everyone, examines some critical issues of next year's changes to the Roth rules.

The monthly Expert Corner is an interview with Yale Professor, Robert Shiller, co-creator of the S&P/Case-Shiller Home Price Indices and the author of numerous books, who addresses such questions as "What's the next big shoe to drop?"

The two charts are interesting (although a bit challenging for us bifocaled readers), but the key feature is the calculator that allows you to see how you compare.

Click this link, scroll down to the calculator, plug in your age and annual income (earned, Social Security, savings withdrawals, etc.), push the "Calculate" button and there you have it!

Of course, to get an accurate comparison, you need a record of your own household spending habits via Quicken, Mint, or the like. If you don't have the numbers for your household, you should start collecting that data — for the past year (we're in the 2009 home stretch) or certainly as a new year's resolution for 2010.

Note: you only have about a week left to take advantage of free access to the FinaMetrica risk-tolerance test mentioned below. Don't miss out — the results may surprise you!

As regular visitors to this website know, I've been a frequent contributor to the Rule Your Retirement subscription service, and I routinely "stroll" the RYR discussion boards as TMFDoug.

It's the third Thursday of November — the day the Rule Your Retirement mid-month update is posted. The latest one is entitled What the People You Wish You'd Listened to Back Then Are Saying Now. Who are the people?

As regular visitors to this website know, I'm a frequent contributor to Rule Your Retirement, and I routinely "stroll" the RYR discussion boards as TMFDoug.

Today is the last day of our two weeks in Hawaii. The third leg of our 17-hour return journey will bring us home to the Carolinas on Tuesday evening, so my daily postings will be delayed yet again tomorrow. After that, I hope to be back on schedule.

The photo here of Kauai's Spouting Horn blowhole shows that, contrary to my previous post, under thre right conditions water, like the market, can defy gravity (ht to Bill Reece for this bit of wisdom).

A vistor to the website pointed out a curious comparison between Waipoo Falls, in Kauai's Waimea Canyon, which I highlighted in a vacation snapshot, and the S&P 500 after the Lehman collapse.

Interesting, perhaps, but I wouldn't push the comaparison too far. Water doesn't flow uphill in nature.

The lead article in the latest Rule Your Retirement newsletter, published yesterday, is entitled "Diversify to Beat the Bear." RYR leader Robert Brokamp, a Certified Financial Planner, examines the grueling bear market from the mid 1960s to 1982 for clues about the effectiveness of diversification during a secular bear market. He asks the question "Did diversification pay off?" and reviews the results of three different asset mixes for three types of investors:

It will be interesting to watch how the S&P 500 interacts with the 50-day moving average this week. Last week the index oscillated around the 50-day MA, closing the week below this popular indicator. The Monday intraday high came within a hair of the 50-day MA before falling back — still closing in the green. Will the 50-day MA, which provided support in early October, now offer resistance?

We'll post the occasional Stockcharts.com snapshot to see how this "encounter" plays out.

I've occasionally featured technical commentary from Serge Perreault, a Chartered Accountant located near Montreal, Canada. Serge has some fascinating observations about the market behavior going into Halloween. Here's a chart he shared with me this morning.

This past week I've noted that the S&P 500 has twice dipped below the 50-day moving average, where it currently resides. Serge points out a couple of additional negative technical developments — appropriate Halloween reading!

Yesterday I updated my chart of the S&P 500 and the 50-day moving average. We saw our favorite index surge 2.25% to rise back above this benchmark indicator.

Today the S&P 500 had a 2.81% selloff, taking it back below the 50-day MA — a disappointing way to end the week. And unfortunately the volume was 15.4% higher than yesterday's advance. We'll post the occasional Stockcharts.com snapshot as this "encounter" plays out.

Yesterday I revisited a chart of the S&P 500 and the 50-day moving average. We saw our favorite index plunge beneath that benchmark indicator.

Today the S&P 500 advanced 2.25%, bringing it back above the 50-day MA. Encouraging? Yes. The one caveat is that the S&P 500 volume was 13% lower than yesterday's selloff. We'll post the occasional Stockcharts.com snapshot as this "encounter" plays out.

Earlier this month I featured a chart of the S&P 500 and the 50-day moving average. We saw that benchmark indicator provide classic support for our favorite index.

Today the S&P 500 dropped decisively through the 50-day MA. Over the next few days market technicians will be watching the follow-on behavior. Will the selloff accelerate? Or will today's 2% decline prove but a brief dip below this classic indicator? We'll post the occasional Stockcharts.com snapshot as this "encounter" plays out.

Update: The selloff today was on increased volume — the highest since the September monthly close.

It's the third Thursday of October — the day the Rule Your Retirement mid-month update is posted. The latest one is entitled You Can't Enjoy Retirement If You're Dead. What's that all about? A topic that rhymes with "wealth" and increases the odds you'll be around to enjoy your retirement.

The update also includes a link to the inaugural quarterly issue of Champion Funds authored by Amanda Kish, a Certified Financial Analyst and the Motley Fool resident mutual fund expert. Topics include:

As regular visitors to this website know, I'm a frequent contributor to the Motley Fool Rule Your Retirement subscription service, and I routinely "stroll" the RYR discussion boards as TMFDoug.

Yesterday I posted an item on one of the Motley Fool Rule Your Retirement discussion boards summarizing a provocative Time.com article entitled Why It's Time to Retire the 401(k). I was typically non-committal in my post, and another regular contributor challenged me: Doug, what are you suggesting?

Over the past several decades, our culture has begun to face an unprecedented threat on a massive scale — longevity risk. There are several direct and indirect factors:

During the summer I featured some commentaries on trading volume during bear market bottoming processes (1929, 1973, and 2000) to get some perspective on the current price-volume relationship.

Today, let's reexamine the topic from a technical perspective, courtesy of some analysis provided previously by Serge Perreault, a Chartered Accountant located near Montreal, Canada. Serge points out that all our charts exhibit some form of Inverse Head And Shoulders (IH&S) formation. As the Investopedia link explains, "Many traders will watch for a large spike in volume to confirm the validity of the breakout."

Here's an annotated chart of the Dow Crash of 1929 and the following rally. The IH&S was a second-take affair. The first breakout above the neckline aborted. About six months later a second breakout succeeded. The heavier volume powered the second rally.

The recovery from the 1973 oil crisis was a simpler IH&S pattern. With the breakout, volume increased and maintained the elevated levels for six months or so.

Like the Crash of 1929, the initial rally off the bottom of the Tech Crash aborted. A more successful rally came six months later. Volume was a factor, although less so than in the two earlier illustrations.

Which brings us to today's market. We've had breakout above the neckline of an IH&S pattern but with low volume compared to the sharp increase in price. The rally above the neckline has been sustained for nearly three months. But the generally decreasing volume is a bit troubling.

Here's an update of a chart I posted in early June comparing two secular bear markets — the current decline since the peak in March 2000 and the S&P 500 from its peak in 1968 to its bottom in 1982. Both are adjusted for inflation using the Bureau of Labor Statistics' Consumer Price Index. The chart excludes dividends.

Most people, even first wave Boomers, don't realize the savagery of that earlier 14-year decline other than perhaps a recollection of the decade of stagflation that started with the 1973 oil embargo. The chart illustrates how both bears behaved over a nine-year period following their peaks and how the stagflation bear continued its race to the bottom for another four-and-a-half years.

The selloff last week dropped the S&P 500 fractionally below the 50-day moving average (MA), with Friday's close just a hair above the line — appropriately red on our Stockcharts.com snapshot. Today this bellwether MA gave us a good bounce, although on fairly slender volume.

Will the 50-day MA continue to provide support? We can entertain ourselves with this bit of technical trivia while waiting for Alcoa to kick off the third-quarter earnings season on Wednesday.

A few days before I posted my latest market valuation update, an email arrived with the following question:

Your chart excludes long bond yields, whereas Robert Shiller includes this data in his spreadsheet. Do you exclude in order to prevent the chart from getting too busy? Or do you think interest rates are reflected in the chart indirectly, via the P/E ratio?

The reference is to the spreadsheet generously shared by Professor Robert Shiller on his Yale website. It includes a chart of the P/E10 ratio and the interest rate on 10-Year Treasuries, an earler version of which appears as Figure 1.3 in the opening chapter of his Irrational Exuberance. In the book Shiller points out the negative correlation between yields and the P/E10 ratio from 1982 to the market peak in 2000. But he also remarks that, over the long haul, the relationship between interest rates and the P/E ratio isn't very strong.

The chart I use in my regular market valuation feature does not include Treasury yields because my focus is the long-term correlation between the P/E10 ratio and market valuation. Adding the Treasury series introduces complexities beyond my topic, and it would be difficult to read atop the P/E10 quintile analysis. Also, since the correlation between the S&P Composite and the P/E10 ratio is so close, charting both against bond yields is a bit redundant. More...

The lead article in the latest Rule Your Retirement newsletter, published today, is entitled "Get a Plan." RYR leader Robert Brokamp, a Certified Financial Planner, explains the five steps in sound retirement planning, and he introduces a new feature on the RYR website available to subscribers. It's a comprehensive set of resources on the following:

Each bar in the chart shows the October close change from the September close. Since 1928 October closes have an average gain of 0.27%, but the month has also been home to a few bear bottoms. Of the eight previous bear markets since 1950, four of them hit their low in October (1957, 1966, 1974 and 2002).

For previous posts on seasonality, see August and September and also my "Behavior of the Months" series: Part 1, Part 2 and Part 3. For an interesting international website with more detail on seasonality and the driving forces behind it, see seasonalcharts.com.

I've received several emails asking why my S&P 500 moving average charts only go back to 1995 even though I frequently mention the data since 1950. There are two reasons: 1) the charts are primarily intended to illustrate the principle, and 2) 59 years of crossovers wouldn't be legible on the typical computer screen.

For those who would like to see the 10- and 12-month simple moving averages and the equity-versus-cash positions since 1950, here's an Excel file (xls format) of the data. My source for the monthly closes (Column B) is Yahoo! Finance. Columns D and F shows the positions signaled by the month-end close for the two SMA strategies.

Simon from Maui emailed me last week about my recent post on federal debt and tax brackets:

Your chart triggered my pet peeve about certain graphs being on a linear scale when they should be plotted on a log scale. The problem is that growth over long periods makes many linear plots resemble a "hockey stick" when they really aren't. Also the nuances of what happened far back in time are often lost because the early part of the curve is under-represented.

I've received several emails with various chart suggestions for federal data — more than I can accommodate. From time to time, however, I'll expand this series with new additions.

Today's chart is an overlay of the historic tax brackets and the federal budget surpluses and deficits since 1900. The dotted line shows the Office of Management and Budget (OMB) estimates for 2009 to 2014. The unprecedented current budget shortfall is, of course, the ongoing effect of the financial crisis. It will be interesting to look back in a few years to see if the OMB estimates were accurate or optimistic:

Yesterday an item at CNNMoney.com reiterated the commonplace warning about the skyrocketing federal debt. The CNN article prompted me to place the U.S. debt since 1900 in a historical context by overlaying it on a chart of tax brackets since the introduction of federal taxes in 1913, a topic previously discussed here.

There are enough debt clocks on the Internet that most people simply tune them out. The purpose of this chart is to offer a somewhat different perspective by highlighting two points:

Update: For a global perspective on debt from 1999 projected to 2011, see this interactive feature from The Economist.

This morning I received an email from Michael in Coleford, Gloucestershire, UK, commenting on our "Real" Mega-Bear 2000 series:

I think it is right to take the top of the Tech Bubble in March 2000 as the starting point. I have not yet seen this anywhere else. When the 2000 crash came the plunge was halted in its tracks by the new round of debt creation. Given the scale of the actions that were taken and the readiness of people to borrow it's not surprising that the rebound was better than the other bears.

I understand why you like inflation-adjusted measures, but for the sake of completeness could you do this chart without the inflation adjustment? Apart from anything else I don't know which inflation measures to trust anymore! I would really like to see the chart as raw indices.

Thanks for the suggestion, Michael. Here's the nominal version of the two-decade version of our Mega-Bear 2000.

The S&P 500 has rallied to a new interim high 52.7% above the March 9th low. Actually the index first topped the 50% mark on August 21st — approximately 24 weeks after the March low.

When was the last time we had such a speedy 50% rally? Here's a chart of the S&P Composite since January 1928, which is as far back as I have daily data for this index. These 24-week wonders are highlighted in red. Not since 1932, near the bottom of the Crash of 1929, have we seen such dramatic gains.

One interesting difference between then and now is the relative market valuation. The P/E10 ratio, which we regularly follow, was 5.6 at the 1932 low. This is the single-digit range of historic secular market bottoms. The P/E10 was 13.4 in March, just marginally below the middle quintile of valuations.

During the summer I've occasionally looked at volume in the S&P 500 for clues about market behavior (for example here and here).

Volume in our current market, however, appears to be a less reliable indicator than in the past. I've seen several claims that trading in five beaten-up financial stocks has dominated market volume. A quick Google search led me to this article by Tyler Durden.

Earlier today I received an email from Rebecca Mitchell, an Investment Analyst at iimia Wealth Management in the UK with an irresistible suggestion:

I was looking at the Short History of Stock Dividends. I like the chart, but was wondering if it would be possible to provide an updated one with two different exponential regression trend lines, one for each period (1870-1982, and 1983-present) to match the two averages for the dividend yield?

If one is to think of the focus on dividend yields as having shifted, the focus on price might also have shifted! More...

Yesterday I posted an updated pair of charts showing the danger of overconfidence in equity diversification as an investment risk-management strategy. Here is a simpler illustration of the value of holding a fixed income allocation and increasing that allocation as retirement approaches, especially if you're counting on your nest egg to fund non-discretionary retirement expenses.

Of course, if your other sources of income — Social Security, pensions, and that bequest from Aunt Susan — will cover all your needs, then no need to fret over a decade or two of portfolio pain. Otherwise, it makes sense to balance risky assets with an appropriate, age-adjusted ratio of fixed-income assets. This will help, as we pointed out previously, to reduce the odds that a market implosion in retirement has you dining on cat food

This latest update shows some recovery of the diversification effect in the equity classes, although the most conspicuous equity variance is the relative underperformance of the REIT index.

How do we protect against these infrequent but destructive events? First we need to understand that they do happen — a reality this website has endeavored to illustrate over the past 18 months. Followers of buy-and-hold investing need to balance risky assets with an appropriate, age-adjusted ratio of fixed-income assets in their portfolios. This will help to minimize the chance that a market implosion near or in retirement is a life-changer.

Regular visitors to this website will recall last month's technical analysis of market volume provided by Serge Perreault, a Chartered Accountant located near Montreal, Canada.

This morning Serge sent me an annotated copy of yesterday's "Road to Recovery" chart with his technical observations on the current market recovery. If I read his comments correctly, a decline to the previous resistance level would take the index to the vicinity of 950-955. Interesting — we'll keep an eye on this.

Earlier this year professors Barry Eichengreen (UC Berkeley) and Kevin H. O'Rourke (Trinity College Dublin) presented a fascinating series of data comparing the the current financial crisis to the Great Depression.

Their latest update, posted yesterday, suggests that world industrial production, trade, and stock markets are showing signs of recovery. However, a pivotal question remains, and it is one on which the hope for a sustained recovery hinges:

This is a sharp divergence from experience in the Great Depression, when the decline in industrial production continued fully for three years. The question now is whether final demand for this increased production will materialise or whether consumer spending, especially in the US, will remain weak, causing the increase in production to go into inventories, leading firms to cut back subsequently, and resulting in a double dip recession.

So what does the future hold? Will consumers return to former spending habits? Or is there a grain of truth in retail expert Howard Davidowitz's histrionic prediction that consumers and retailers are "in the tank forever"?

Davidowitz obviously overstates his case. "Forever" is a long time. But I think it likely that US consumption may indeed undergo a generational change. The process will be driven by the continuing need to reduce personal debt, and it will be exacerbated by the demographic impact of the aging boomers and their need to defer some of their discretionary consumption to fund the non-discretionary expenses of their senior years.

When we measure monthly performance as a percent gain or loss from the previous monthly close, September has the distinction of being the worst performing month in the S&P 500 since 1928, which is far back as I have S&P monthly close data.*

Each bar in the chart shows the September close change from the August close. Since 1928 September closes have averaged -1.27%. The only other month with a negative average change is February, with a -0.31% over the same timeframe.

For previous posts on seasonality, see August and also my "Behavior of the Months" series: Part 1, Part 2 and Part 3. For an interesting international website with more detail on seasonality and the driving forces behind it, see seasonalcharts.com.

For anyone interested in the 10-month simple moving average (SMA) timing strategy presented in The Ivy Portfolio of Mebane Faber and Eric Richardson, see these charts. The 10-month SMA is shown in blue. I've also included a 12-month SMA (the red line) for those of us who favor the longer signal timeframe.

August closed the month up 3.36% from the July close. Let's review how the month has behaved in the S&P 500 since 1928.

Each bar in the chart shows the August close change from the July close. Historically, August has been a good month, with an average gain of 0.88%. August 2009 ranks 21st in this 82-year timeframe (down from 14th place as of yesterday's close).

For previous posts on seasonality, see my "Behavior of the Months" series: Part 1, Part 2 and Part 3. For an interesting international website with more detail on seasonality and the driving forces behind it, see seasonalcharts.com.

After posting my previous chart on taxes and the market, I received several requests for one that shows all the tax brackets. So here it is. Click the small chart for a larger image.

When I was developing this chart, I drafted a version with the major wars highlighted (WW I, WW II, Korean Conflict, Vietnam, Gulf War and the more recent wars in Afghanistan and Iraq).

But the chart got rather cluttered, and dating the beginnings of the wars was problematical. Initial conflict or American involvement? In the case of Vietnam, what level of involvement? (Apologies to the 40% of my website visitors residing outside the U.S. for this nationalistic focus, but the topic is U.S. taxation).

So I invite you to visualize an overlay of major wars with your own idea of their beginnings and durations. In some cases (WW I and II), the changes in federal taxation match the U.S. involvement in the war. Less immediately intuitive, as I implied in my original commentary, is the inverse correlation between the market and taxes during the Great Depression.

Ultimately this chart reinforces my earlier conclusion about future taxation. With the high cost of the federal government's strategies for solving the current financial crisis and the expiration of the Bush tax cuts in 2010, tax increases are inevitable. The only question is how high will they go and how quickly it will happen.

Earlier today CNNMoney featured an article entitled Why the deficit will raise taxes. The premise is summarized in the subtitle: The nation's debt must be brought to heel, and doing so will require tough choices beyond spending cuts, experts say.

Here's a chart that provides a historical perspective on market performance and federal taxation, which began in 1913. I've included only the top and bottom brackets.

The relationship between taxation and the market is controversial. Many people believe that the market is generally helped by tax cuts and harmed by increases. Perhaps there is some truth to this belief.

On the other hand, federal debt can force tax increases on a weakened economy. The S&P Composite had lost over two-thirds of its value in early 1932 when the top marginal tax rate was increased from 25% to 63%. The top rate increased to 79% in 1936, a rate that held through the Great Depression. The New Deal was expensive.

World War II costs triggered additional increases: The top rate jumped to 81% in 1941, 88% in 1942, and 94% in 1944. The top bracket remained above 90% until 1964.

With the Bush tax cuts set to expire in 2010 and the federal deficit skyrocketing, tax increases are probably inevitable.

Yippee! I am happy to report that Citibank now acknowledges that I exist as a person living at my current address. You might wonder why this is cause for celebration. Well, it took me six weeks, four memos, and countless telephone calls to prove my existence.

In early July, Doug and I both received one of the teasers we all get from credit card companies. This time, it was a Citibank offer with a bonus of 30,000 American Airlines points. I prevailed over Doug's predictable objection ("we've already got a credit card") and applied online. I also made him apply (naturally, another 30,000 points).

Doug's application was immediately approved online and he received his card a few days later. My online application met a different fate. More...

The previous posts in this series (part 1 and part 2) used two different methods to analyze the monthly seasonality in the S&P 500 since 1950. Here we'll apply the second method — monthly averages of daily closes — to the seven two-decade periods since 1871.

The first post in this series compared the average monthly closes in the S&P 500 since 1950. The blue bars in our chart represent the average closing gain (or loss) by calendar month over those 58+ years.

This updated chart adds an alternative way to measure monthly behavior. The gray bars represent the monthly averages of daily closes. In effect, we're incorporating the intra-month daily volatility into the monthly measure. This method of comparison probably has little interest for short-term traders. But long-term investors may find it intriguing for a couple of reasons. More...

"Sell in May and go away", summer rallies, the January effect — all are familiar phrases to seasoned investors (pun intended). Is there any truth to market seasonality? The accompanying chart shows the monthly performance the S&P 500 since 1950. The blue bars represent the average monthly close change from the previous month.

At least since 1950, there have been some broad patterns of good months and bad months. Of course, monthly performance in any given year is anyone's guess. More...

Ok, I am passionate about eating out, wine at happy hour, and travel. What can I say — I want wine, not water! Now it seems that my passion is on a collision course with my husband's obsession with the economy. Alas, it seems nothing, including wine, is immune to the recession. In the August 31 issue of Wine Spectator, three articles address the impact of today's economy on charitable giving, on wine in restaurants, and on our spending habits. More...

Since introducing my Road to Recovery feature, I've received several requests for an inflation-adjusted version. So here it is.

Even over this short time frame — a bit less than three years — inflation makes a difference. When we compare the nominal and real charts, the "real" Crash of 1929 is slightly less horrific (courtesy of deflation) and the other three rallies are less dramatic (reduced by inflation). The weaker recovery is especially evident in the rebound from the Oil Crisis, which, of course, was the era of stagflation (a portmanteau of "inflation" and "stagnation").

For the past ten months, the Four Bad Bears overlay has been a regular feature of this website. Let's pause a moment and review those individual bears in the larger historical context. Here is a nominal chart of the S&P Composite since 1871 with our Four Bad Boys highlighted in red.

Now let's look at a real chart (inflation-adjusted) of the same data, this time with a trend line drawn by Excel. The real chart also includes callouts showing market valuation at the tops and bottoms of the four bears using the P/E10 ratio.

Then let's study a "real" close-up of the Oil Crisis, Tech Crash, and Financial Crisis.

After seeing the Road to Recovery chart, Steve Cassaday, President and CEO of Cassaday & Company, sent me an email suggesting an alternative alignment of those bear lows. Steve explains:

The objective is to start from the point where the major advance began rather than the exact low. When one does this the advances are remarkably similar. We believe that this occurs because once investors "buy in" psychologically to the idea that a new bottom is in place and that the worst is over, then the advance progresses with increased vigor. Even though the causes of each decline were different, the common thread in each is the emotional component of human nature.

Indeed the S&P 500 Oil Crisis and Tech Crash bear market bottoms were both tested months after their lows. These higher lows (about two months later for the Oil Crisis and five months for the Tech Crash) were followed by strong recoveries. This chart aligns those higher lows with the March 9th Financial Crisis bottom. This overlay thus gives a more optimistic view of the current market.

It's quiz time! So don't peek at the chart until you've answered the question below. Our topic is the percentage of all-time daily highs in the Dow since 1900, a total of 29,552 market days. Now the question:

What percentage of the Dow daily closes since January 2, 1900 have been all-time new highs?

Today's email included a plausible hypothesis for the volume disconnect (original post below) sent by the VP of Institutional Trading at a major investment company:

Big firms use SPY to hedge risk, primarily in options. Option volumes have fallen recently because of the surge in the overall market.

Clients use options much more frequently when the market is falling than when its rising. Thus dealers haven't been particularly active and aren't using SPY that much to hedge their risk.

Of course that's just a back of the envelope theory, its certainly not definitive. There are probably a few things going on, but it's not some major conspiracy or indicative of a "fake rally." More...

Is there a precedent for the current S&P 500 rally — one that reversed and headed lower? Yes.

Here is an overlay of the 1929 Dow and today's S&P 500. The first Dow interim low is aligned with the S&P 500 March 9th closing low.

This chart is not intended as a forecast. Let's call it an interesting observation of an eerie resemblance.

As of this morning, the latest Standard & Poor's earnings data is the July 31 spreadsheet. The trailing-twelve-month (TTM) P/E and P/E10 remain unchanged.

My latest total return updates prompted an email from Jeff in Huntsville, Alabama:

I am curious about one thing: Have you ever made a 5-year version of your S&P returns with dividends chart? I often listen to Dave Ramsey's personal finance radio program, and his standard advice is to invest money in stocks as long as your time horizon is at least 5 years. I am curious what portion of 5 year periods have a poor rate of real returns.

Well, Jeff, I've now added a 5-year roller coaster to our total returns amusement park. At first glance, the chart looks surprisingly similar to the 10-year version. But I had to rescale the Y-axis to keep the increased volatility on the chart. The average of those 5-year rolling returns is a comfortable 7.08%. But the range goes from delirious 33.35% to a disastrous -13.22%. And remember, these are annualized total returns. The -8.12% rate for March 2009 computes to a 34.5% portfolio decline over five years. That would be rather alarming for the college fund of a young teenager or the aging boomer's dream of retirement.

If you really need the money in five years, stocks are risky. The real annualized return has been less than 5% about 39% of the time, and 19% of the time it put you in the red.

Here's another chart from Praveen Chawla. It shows an apparent correlation between bear market declines and length of time it takes to recover to the pre-bear high. Each data point represents the year in which a bear ends. The underlying price levels are nominal (not adjusted for inflation), and the recovery level does not include reinvested dividends.

The curved line is a polynomial regression drawn by Excel to mark the best fit through the data points. The estimated for the current bear recovery is a guess based on the regression using the March low.

Of course, this isn't a crystal ball. The teddy bear that took so long to end in 1885 was a clear outlier. Perhaps the data point for our current market will ultimately be an outlier on the other side.

Here's a sobering set of charts that will especially resonate with those of us who follow economic cycles.

Imagine that ten years ago you invested $10,000 in the S&P 500. How much would it be worth today, adjusted for inflation with dividends reinvested? Brace yourself: Your investment has shrunk to about $6,417, an annualized return of -4.34%. That's a 35.8% loss.

And this is an improvement over the same ten-year return as of March, when your annualized return would have been -5.93%, for a total loss of 45.7%.

Now let's imagine that we time-travel back to September 2000 and pose the same question. More...

A few days ago I posted a chart of the S&P 500 created by Praveen Chawla using the Mekko Chart Creator, an Excel add-on.

Here is his latest update, which extends the time frame back to 1871. Note: This is a wide chart, so if your computer has a screen like mine, you'll need some horizontal scrolling.

The chart gives a curious perspective (those gold blocks) on the time spent recovering from bear bottoms to the pre-bear level. That big gold block after the Crash of 1929 is the dominant feature. Of course, a total return version would be radically different (That's a hint, Praveen).

Last week we featured some commentaries on trading volume during bear market bottoming processes (1929, 1973, and 2000) to get some perspective on the current price-volume relationship.

Today, let's examine the topic from a technical perspective, courtesy of some analysis provided by Serge Perreault, a Chartered Accountant located near Montreal, Canada. Serge points out that all our charts exhibit some form of Inverse Head And Shoulders (IH&S) formation. As the Investopedia link explains, "Many traders will watch for a large spike in volume to confirm the validity of the breakout." More...

In response to my earlier chart of the S&P 500 12-month simple moving average variance since 1950, I received a request to chart the variance back to the Dow Crash of 1929 or even 1900. Problem is, I don't have access to the S&P Composite monthly closes prior to 1950. The charts I make of earlier time frames are based on the monthly averages of daily closes made available by Yale professor Robert Shiller.

So here's a chart that plots the variance based on the Dow, for which I have daily data since 1900. In the S&P chart we focused on the SMA variance below 25% — an arbitrary threshold, to be sure, but one that helps us compare the relative cliff-dives of the really nasty bears. Here are the results in reverse chronology: More...

I visit your site regularly. Your charts help me keep a perspective relative to the sweep of history. While the past is not prologue, it does rhyme.

I wanted to share with you a chart I have been working on that illustrates the relative breadth and depth of bear/bull market cycles. I plan to update it on a monthly basis.

In a subsequent email, Praveen mentioned that he's planning a chart based on the monthly averages of daily closes since 1871, the data set graciously shared by Yale professor Robert Shiller.

For a interesting take on the depth and speed of the 2007 bear market in the S&P 500, here's a chart showing the index and the variance above and below the 12-month simple moving average (SMA).

Prior to this bear, since 1950 we experienced a 25% plus variance below the 12-month SMA for only one month in 1974. Last year the index dropped over 25% below this threshold for six consecutive months (Oct-08 to Mar-09). It finally moved into positive territory with the July close — up 5.1%.

Last night Calculated Risk embedded this hilarious SNL skit, Don't buy stuff you cannot afford.

I remembered seeing the skit and was curious when it first aired. A bit of research on the tv.com website gave me the date: February 4th 2006. With this in mind, let's have another look at the S&P Case-Shiller Index. More...

Here's a quick look at Gross Domestic Product (GDP) since 1948 together with the real (inflation-adjusted) S&P Composite.

The question that this chart triggers is whether our current market slump will be more like 1973-1975, which saw a continuation of a secular bear, or 1981-1982, which was followed by a new secular bull market.

Next in our series on the price-volume relationship in our Four Bad Bears lineup is the 2000-2002 Tech Crash. Like the Oil Crisis bear, the S&P 500 lost nearly half its value — this time over a 31-month period.

As we've seen, the 1929 Dow Crash had a clear pattern of decreasing capitulation volume spikes with seller exhaustion (an absence of volume) at the bottom. In contrast, volume throughout the 1973-1974 Oil Crisis was rather unremarkable. The price-volume relationship in the Tech Crash fits somewhere in between. More...

Next in our series on the price-volume relationship in our Four Bad Bears lineup is the 1973-1974 Oil Crisis. During this 21-month period, the S&P 500 lost nearly half its value — a market meltdown triggered in large part by the Oil Embargo and exacerbated by a 16-month recession and the onset of nearly a decade of elevated inflation.

The 1929 Dow Crash had a clear pattern of decreasing capitulation volume spikes with seller exhaustion — an absence of volume — at the bottom. In contrast, volume throughout the 1973-1974 bear was rather unremarkable. More...

In recent weeks I've been commenting on the relationship between price and volume in the current S&P 500, which has triggered several emails asking about volume in previous market downturns. So let's examine the three other bears in our Four Bad Bears lineup over the next few days, and then try to draw some conclusions.

First up is the Crash of 1929. Market pundits frequently talk about capitulation selling at market bottoms. As our chart of the Dow clearly illustrates, the opposite was the case in the epic bear that ushered in the Great Depression. Yes, the initial interim bottom saw capitulation selling. But there were another six legs down, each marked by decreasing selling pressure. In 1932, 34 months after the 1929 Dow peak, The ultimate bottom occurred on extremely weak volume.

Check back in another day or two for a look at the price-volume relationship during the 1973 Oil Crisis.

Where does the S&P 500 go from here? Why up, of course, or so says what I'll call the CNBC Indicator. Earlier this evening, the sidebar of the CNBC website was a resounding chorus of bullish forecasts:

Let's check back in a couple of months to see if the CNBC read on the market is a positive or a contrary indicator.

The accompanying chart shows the S&P 500 since January 2007 together with the volume and a 10-day exponential moving average (MA) of the volume. The moving average smoothes out daily volume volatility and helps us see the trends. In previous versions of this chart, the MA was simple, but this update has switched to the exponential variety to be more sensitive to the latest volume trend.

Note the frequent inverse relationship between price and volume — for example, the rise in volume accompanying the index decline from early January of this year to the March 9th low. Then the relationship reversed. More...

In early August we'll update our monthly S&P Regression feature. Meanwhile, here's an interesting observation from Floyd Flanagan, who sent me an annotated version of our regression chart. Floyd writes:

After many years above trend, the index tapped the regression line in 1907 and 1971 — both times several years before a severe overshoot to the downside. Maybe the current V-shaped recovery is just a sustained breather before the downward plunge resumes a few years hence.

Thanks, Floyd. As you're aware, these regression patterns play out over long time frames, so it may be a while before we know if another overshoot is in the cards.

For those who correctly understand that the "real" S&P 500 bear market started in 2000 with the Tech Crash, here is a chart that overlays its performance on the legendary Dow Crash and Great Depression. Both are adjusted for inflation using the Bureau of Labor Statistics' Consumer Price Index (CPI). Dividends are excluded.

Most people, however, evaluate market performance in nominal terms with no inflation adjustment, as in this chart, which obscures the true origin of our 21st century downturn. Such charts also foster what economists call the money illusion — an unreal image of wealth based on nominal dollar terms.

But wait. Could it be that even in our inflation-adjusted chart, the current bear gets a "money illusion" boost? More...

The latest issue of Retirement Income Journal includes an interesting article with the unsurprising title Insecurity Grows Among Retirees. The article reports on a follow-up survey of retirees ages 55 to 75 with $100,000 or more in household investable assets that was conducted in February 2008, prior to the financial downturn.

The survey findings predictably reiterate the "insecurity" theme: The respondents feel less secure after the crisis, are less confident that they have saved enough for retirement, are more conservative and less willing to take risk, etc.

This morning's email brought an especially interesting response from Robert Evren to our recent Tale of Two Regressions article. Robert is an astute market watcher from the Boston area. He writes:

Have you noticed the amount of talk about the formation of a head-and-shoulders pattern? Even the Financial Times has joined in. Such discussion often makes the unwarranted assumption that this formation somehow definitively marks the bottom of a bear market, possibly because it shows up at the bottoms in 1973 and 2003.

This just in from Jim D, an astute reader who double-checked the recent shoe data we reported:

The statement in your recent shoe index article that the average family of four would spend about $2700 annually on shoes has an error. Taking stats from different sources — the number of shoes from one and the average price of shoes from another — results in an 'apples and oranges' comparison. After all, many discount shoes are sold in Target, Wal-Mart and Kmart that are not accounted for in the National Shoe Retailers Association reporting that the average per-pair price for their stores is $85. More...

Will your retirement be well capitalized? We usually think of capital in financial terms, so the first thought that pops into your mind is probably the size of your nest egg, which for most people has undergone serious shrinkage over the past two years.

The Retirement Income Industry Association (RIIA) takes a broader view of personal capital than your net worth. RIIA has been developing a "body of knowledge" for a new professional designation, the Retirement Management Analyst (RMA).

I've received a curious number of emails on yesterday's shoe index commentary, mostly skeptical about my twenty-year-old sandals. Well here they are, being admired by a beetle near Taos, New Mexico. I bought these Timberlands for our first trip to Akumal, in 1988. They're fabulous! And so is Akumal.

Fly into Cancun, drive south for a little over an hour, and turn left. We like to rent a condo on Half Moon Bay.

William Witzeman from El Centro, California emailed me earlier this week with an alternate take on the linear regressions in our Connect the Dow Dots discussion. He writes:

When the bottom dropped out of the stock market last September, I though the move was extreme. And when we finally got on the same track as the Great Depression in March, things appeared to be quite overdone. Over the same elapsed, time the current crisis is more severe and perhaps destined to be longer lasting than the Tech Crash or Oil Crisis. It seems implausible that this bear market ended in March after a mere 17 months.

So I propose a different line. I would like to see what the linear regression would look like if drawn from the 2007 peak to just before the Lehman collapse and then extended to month 34 (excluding the actual data from the Lehman collapse to present).

Before the financial meltdown, the main focus of this website was retirement planning. We'll occasionally revisit our roots, and for starters, I'd suggest that readers check out the new website decumulation.org, a service of the National Endowment for Financial Education.

The slogan of the website is "Understanding Your Retirement Paycheck." The domain name, decumulation.org, refers to that stage in our financial life cycles when we "decumulate" (spend down) assets rather than accumulate them.

Willem Grooters in the Netherlands occasionally emails me his thoughts on the current S&P 500 relative to the Dow Crash of 1929. Mr. Grooters draws a line between the 1929 high and the 1932 bottom, noting the coincidental oscillation of today's bear around this line. His analysis of trailing 12-month earnings suggests that this pattern may continue — that the current correction could well take us back below the line.

I should emphasize that the line on this chart is arbitrary — the shortest line between two dots. It's not a regression, and the only thing it shares with the S&P 500 chart is the 0% starting point. However, if we let Excel plot a linear regression on our current bear, the slope is remarkably similar to Mr. Grooter's red line. Click here to see.

Last night, in response to my latest update on the valuation of the U.S. market, I received a thoughtful email from Theodore Keeler, Professor Emeritus of Economics at UC Berkeley. Professor Keeler writes:

When you calculate overall stock price trends, you revise the post-1982 inflation figures with data from Shadowstats.com. Though the old method of calculating inflation may be inferior to the current one, I agree that it makes the most sense to compare stock prices based on a consistently-measured inflation figure.

My question is, why not also correct the P/E10 figures for inflation using the Shadowstats.com CPI numbers? As I understand it, the Shadowstats numbers yield generally higher inflation figures after 1982 than the official ones. That means that, all other things equal, as inflation goes up, today's price is worth less relative to last year's earnings. Therefore, use of a higher inflation correction will lower the real value of the P/E10, relative to a lower inflation correction.

I wonder what the Mega Bear chart or Four Bad Bears chart would look like if you started this decline in the fall of 2008. It seems that the decline would be right on top of the 1929 decline. Have you looked at the charts that way?

Good question! Let's take a look. As this overlay chart shows, the Dow Crash of 1929 began with a precipitous drop in the first few weeks of the bear market. The current bear experienced a similar cliff-dive, but since it happened so long after the start of this cyclical bear, it didn't have the same immediate shock effect. More...

The 4th of July is a happy day in my household, especially since 1973, when our second child was born in the wee hours of the holiday. Three years ago, July 4th was the celebratory peak of my first week of retirement (an event I'm still enjoying).

I installed Google analytics on this website in January. Today, nearly six months later, the latest report shows over two million page hits during nearly 600,000 visits by more than 250,000 people. So I make these observations about July 4th with the grateful awareness that 40% of the visits to this website are from outside the United States.

The only 4th of July that I spent abroad was in 1965 as a college student at the University of Sussex. I was enrolled in a summer program for American students to broaden our knowledge of English history and literature (I was an English major). A group of us smugly challenged some cricket-loving Brits to a game of baseball. Two hours later we, the humiliated losers, we're treating them to pints at the local pub.

Yesterday, with mixed feelings, I installed Google ads on my website. I hope this experiment in capitalism won't be annoying to visitors. I launched dshort.com in early 2005, and it has exceeded expectations in providing me with an absorbing hobby. However, my wife's attitude toward my daily updates is — how shall I say — less than enthusiastic. So I'm hoping some ad clicks will help subsidize the occasional dinner and a movie to ensure her continued tolerance for my retirement pursuits.

Visitors to this website should check out this great new calculator at Political Calculations:

For example, an initial investment of $1000 with $100 added monthly beginning in January 1990 would have had an average annual real (inflation-adjusted) gain of 11.67%, including dividends over the following ten years. Nice!

Let's consider another example, this time starting with the S&P inflation-adjusted all-time monthly-average high, which occurred in September 2000. A $1000 investment that month plus $100 monthly had an average annual real return of -2.96% by the end of last month — a negative return, and that's with dividends included!

What about the same investment regimen over an equivalent time frame (106 months) following the 1929 S&P Composite high? Brace yourself. It would have given you a positive average annual rate of return, with dividends, of 1.35%. Right — that's 4.31% per year higher than the current secular bear.

In an earlier article I shared the mesmerizing work of lnxrlz007, who set our bear charts to music. "I wonder what they'd sound like as four-voice polyphony?" I remarked at the article's close. Well, this morning, lnxrlz007 has furnished the answer:

Here's another chart for those who understand that the current bear market in the S&P 500 started in 2000.

The chart is an overlay of our current bear since the peak in March 2000 and the S&P 500 from its peak in 1968 to its gnarly bottom in 1982. Both are adjusted for inflation using the Bureau of Labor Statistics' Consumer Price Index. The charts exclude dividends.

Most people, even first wave Boomers, don't realize the savagery of that earlier 14-year decline other than perhaps a recollection of the rampant decade of stagflation that started with the 1973 oil embargo. The chart illustrates how both bears behaved over a nine-year period following their peaks and how the stagflation bear continued its race to the bottom for another four-and-a-half years.

For those of us who believe the current bear market in the S&P 500 started in 2000 with the Tech Crash, here is a chart that resonates.

The chart is an overlay of the S&P 500 from the peak in March 2000 and the Dow from the peak in 1929. Both are adjusted for inflation using the Bureau of Labor Statistics' Consumer Price Index. The charts exclude dividends. We can see how both indexes behaved over a nine-year period following the peak and how the Dow comported itself over the next decade.

Here's another in our series comparing total return in today's bear market with the Crash of 1929 (previously here and here).

In real (inflation-adjusted) terms, the S&P Composite needed 29.25 years to regain the 1929 pre-crash high. However, with dividends reinvested, the inflation-adjusted total return was an impressive 385.9% when the index price finally broke even in November 1958.

Will the secular bear market that began in 2000 have the same total-return success when the S&P 500 eventually breaks even? Given the much lower dividend yield over the past two decades, the prospects are far less encouraging. More...

Here's a follow-up on our previous comparison of total returns in today's bear market and the Crash of 1929. In real (inflation-adjusted) index price, the all-time market high occurred in 2000, not 2007. So we've modified our previous comparison by starting the current decline in August 2000 and overlaying an equivalent period from the Crash of 1929 into the Great Depression. We're using monthly averages of daily closes for data points, which is why we're starting the current secualr bear in August 2000 rather than March. Although the daily high did occur in March, the monthly average of daily closes peaked five months later.

This new chart offers a fascinating — and somewhat disturbing — comparison. Like the earlier chart this one shows both the index price (excluding dividends) and total return (with dividends). More...

The Four Bad Bears chart on this website uses the Dow for the Crash of 1929 and the S&P 500 for the other three bears. It's a bit of an apples and oranges comparison necessitated by my lack of daily data for the S&P index prior to 1950. I've also rationalized the combination because of the popularity of the Dow as an emblem of the earlier era and its increasing irrelevance as an indicator for the broader market over the past couple of decades.

Here's a the first chart in new series that focuses exclusively on the S&P Composite. It's based on real (inflation-adjusted) monthly averages of daily closes. Also, the chart shows both the price (excluding dividends) and total return (with dividends). More...

The S&P 500 is up nearly 36% from its bear market low on March 9th. Sentiment is somewhat less negative on several fronts. Credit crisis indicators, the ADP employment report, bank stress test leaks, and the market rally itself have all encouraged optimism that the worst is over.

According to Wall Street, the market is forward looking. But has the market really discounted the future impact of continuing mortgage resets? Here's a widely circulated Credit Suisse histogram of resets to which I've added a thumbnail of the S&P 500 matching the timeline from October 2007 to the present. There are a lot more resets ahead — option-adjustable, prime and alt-A — over the next 2 1/2 years.

Earlier this week I received an email questioning my percent decline and gain numbers for the current market.

"How can the S&P 500 still be down over 45% if we've had a rally of more than 25%?"

Experienced investors understand the concept that a 50% loss requires a 100% gain to break even. But a chart gives us a clear illustration of the exponential relationship between a percent loss and the gain required for a full recovery.

Fortunately, the right end of this "Hockey Stick Curve" is rarely relevant for broad indexes. But individual stocks are a different matter. As of today, Citigroup, Inc. (C) has rallied 319% off its low of 1.02 set on March 5th, which was a 98% decline from its all-time high in December 2006. But even with its 319% gain, the stock is still down 93.6%.

The mission of this website is financial life cycle planning with a special focus on retirement. Over the past several months, the mission has been sidetracked by the economic meltdown, and our focus has been diverted to the astonishing behavior of the market.

But the 2009 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI) reminds us of our original purpose. The press release announcing the publication sets the tone:

The recession has cast a pall over the retirement expectations of the vast majority of Americans, leaving a record-low 13 percent this year able to say they are very confident of having enough money to live comfortably in retirement, according to the 19th Annual Retirement Confidence Survey (RCS) released today by the nonpartisan Employee Benefit Research Institute (EBRI). Among workers, those feeling very confident about retirement has tumbled by one-half in the last two years.

PS: Our wire transfer went through without a hitch (hat tip the FDIC); we closed on the condo near our little granddaughter on May 28th — the week after her first birthday.

Hi Doug,

Found your website very interesting. The graph of the 4 bears is fascinating.

I would like to plot that data into a tone generator and thus make a tune ;-) (will probably sound like a Stuka bomber)

Is it possible for you to let me have the data?

lnxrlz007

This website takes a historical perspective on the markets and economy and generally avoids forecasts. Nevertheless, here's an interesting email I received this weekend:

Dear Doug,

I have been studying your chart of the current market and would like you to consider three SEEMINGLY IDENTICAL POINTS — 12%, 7.4%, and 37.4% — and take notice of the subsequent action. Eerie is it not?

John B.

Q. Would you agree that the secular bear market is not over? On your charts secular bear markets end significantly below the long term trend line. We are presently at the trend line, but that doesn't rule out a bear market rally like we had from early 2003 to late 2007. — A.L., by email

A. Secular tops and bottoms can only be identified from a distance in the rear view mirror. A trend line (exponential regression on a log-scale chart) through the S&P Composite since 1871 puts the curent index price very near that line. As our chart shows, the market has a tendency to overshoot in the opposite direction, which raises the risk of further declines.

It may thus seem reasonable to expect this overshoot to happen again. And perhaps it will. But the historical record is quite limited. We've only had four or five secular round-trips over the past 138 years. That's enough to suggest a pattern — but not enough to confirm one. More...

After my latest post on P/E ratios, I've received some emails requesting a visual comparison of the conventional P/E with the P/E10. Here's a chart that overlays the two and rather dramatically illustrates why the trailing twelve month (TTM) P/E is useless as an indicator of market valuation. The April average of daily closes for the S&P 500 was 848.15. Based on the latest Standard & Poor's spreadsheet, the interpolated TTM earnings number for the index is 4.59. That gives us a conventional P/E of 184.9.

Think that's nuts? Check out the P/E based on today's close of 907.24 and the May interpolated TTM earnings of 2.51. That gives us a P/E of 361.

Maybe I'm too harsh in labeling the conventional P/E as useless. Actually it's good for a few laughs.

Earlier this week the Bureau of Labor Statistics (BLS) announced a Consumer Price Index number for March that showed an annualized negative number. It was tiny, a mere -0.38%. But it was the first negative annualized rate since August of 1955. Is it a hint of more to come?

Deflation has been a chronic problem in the Japanese economy since the Nikkei 225 topped out in 1989, and it was a debilitating problem during the Great Depression. There are a few economists who see deflation as a threat to the U.S. economy on the expectation of continuing unemployment and consumer deleveraging.

But the consensus seems to believe that monetary easing by the Federal Reserve is more likely to trigger the reverse problem — higher inflation. Some even foresee a return to the sustained inflation of the seventies and early eighties. This is yet another topic that demonstrates the heightened "Uncertainty Factor" in today's economy and its imperfect reflection in the markets.

And speaking of the markets, most people think only in terms of nominal price values with little consideration of real (inflation-adjusted) performance. But over longer periods inflation and deflation are major factors. The thumbnails to the right offer a quick comparison of our Four Bad Bears chart in nominal, real, and alternate-real formats. In nominal prices, our current bear has begun to pull away from the treacherous slope that led to the Great Depression. That's not the case in real prices, mostly because (ironically) the deflation of the earlier period makes the 1929-32 decline seem less grave. If the ShadowStats Alternate CPI adjustment has any credence, the real comparison is even more bizarre. The ShadowStats claim of understated inflation since 1982 makes the Tech and current declines significantly more severe.

Click on the small charts for a series of larger versions. Use the blue links at the top to navigate among them.

A review of The Ivy Portfolio by Mebane T. Faber and Eric W. Richardson
April 6, 2009

A regular feature of this website is the monthly update on a simple market timing strategy with moving averages. Those updates have included a link to Mebane Faber's excellent article A Quantitative Approach to Tactical Asset Allocation, published by the Journal of Wealth Management, and available in PDF format here. Well, that article is no longer my top recommendation for market timing. That honor now belongs to Faber's new book, The Ivy Portfolio, written in collaboration with Eric Richardson.

The significance of the title is revealed in the post-colonic surge, How to Invest Like the Top Endowments and Avoid Bear Markets. Part one of the book's three-part structure gives an overview of the Yale and Harvard Endowments — how they originated, how they invest, and how an individual investor can incorporate some of their most effective techniques. In a section headed Implementing Your Portfolio, the authors identify three sample Ivy Portfolios utilizing ETFs: a simple portfolio of five ETFs and more complex alternatives with 10 and 20 ETFs. More...

The financial press was quick to point out that the 21.6% S&P 500 rally since March 9th was the fastest two-week advance since 1938. Is this a useful indicator? A sufficient cause for hope?

A look at market history teaches us that bear market rallies are quite unpredictable. The savage 1973-1974 bear had two rallies of approximately 10%. The 2000-2002 bear had three substantial rallies (19%, 21.4%, and 20.7%). The current bear has had four double-digit rallies (12%, 18.5%, 24.6% and the recent 21.6%).

But the Grandpa bear Dow crash of 1929-1932 had a total of five 20%-plus rallies over the course if its 34-month decline of 89.2%. The first was a massive 48% rally. The last rally of 24.6% was followed by a final decline of 53.6%.

We're all hopeful that the latest rally will prove to be the beginning of a new bull market. But history suggests we proceed with caution in our financial planning.

Footnote: The current bear market is in the middle of its 17th month. At the equivalent point in the 34-month crash of 1929, the market was nearing the end of the second of its five bear market rallies.

Here's a bit of trivia to contemplate while the latest S&P 500 rally decides whether it has staying power.

Since this bear market began in October 2007, we've seen periods of amazing volatility. So how do the days of the week stack up against each other? Do they have unique personalities?

As visitors to this website know, I like to look at real (inflation-adjusted) prices of the popular indexes.

Here's an interesting tidbit. In real value, the Dow low of 6726.02 on March 3rd brought the index to a level very near the record high in 1966 — 43 years ago. How close? A mere drop of 1.9% would have taken us back to the year of The Beatles album Revolver. Shades of Eleanor Rigby!

Here's a Friday trivia quiz to trigger some thoughts over the three-day weekend. Our topic is the real (inflation-adjusted) performance of the Dow since 1900.

At the bottom of the bear market in 1982, in real terms, the Dow dropped below levels seen in which of the following years?

Note: Yesterday the NY Times featured a chart of S&P 500 total returns since the late 1930s with recessions highlighted. Let's extend the analysis back to 1880 by adding recessions to one of the charts featured below. The slight differences in return values from the NYT chart reflect our use of monthly averages of daily closes for calculations.

Imagine that ten years ago you made a single, lump-sum investment in the S&P 500. How much would it be worth today, excluding dividends and adjusted for inflation? Brace yourself: Your investment lost 43% for an annualized return of minus 5.4%.

Now let's imagine that we time-travel back to September 2000 and pose the same question. Your ten-year holding would have had an inflation-adjusted gain of 255% for an annualized return of 14%. More...

Compared to Buy and Hold strategies, investing with a Simple Moving Average (SMA) system improves returns because of the effect of serial correlation in SMA signals.

Serially correlated signals are those where the value in one time interval is predicative of the value in the subsequent interval. For example, in a 10-month SMA strategy, if the one-month average is greater than the 10-month SMA (let's label this state +), then next month the one-month average is also likely to be greater than the 10-month SMA (+). Similarly, if the one-month average is less than the 10-month SMA (-), then next month the signal is also likely to be (-). In an SMA system, we don't know when the series will change from + to -, or - to +, but the system works because + months are more likely than average to be followed by + months, and - months by - months. More...

This item was posted a few hours before the market closed, ending out the month. By the close of trading, the January decline of 8.57% in the S&P 500 became the worst ever, snapping the 39-year record decline of January 1970. Incidentally, the index finished 1970 in positive territory — up 0.10%.

Here's a table of all the years with a negative annual return in the S&P Composite since 1871. The data underlying the annual percentages is the monthly average of daily closes from December to December.

Fifty of the 137 years had a negative return. About half the time (26 to be exact) the January monthly average was also in the red.

Of the 87 years with a positive return, the January monthly average was negative only 15 times: 1885, 1895, 1916, 1919, 1922, 1927, 1948, 1956, 1968, 1978, 1982, 1991, 1993, 2003, and 2005.

Thus Charles Dickens opens his Tale of Two Cities with one of the most memorable lines in literature.

I was reminded of this passage while analyzing Dow data since 1922. Why that date? It's after the grueling bear market that ended in 1921 and well before the dramatic gains of the Roaring Twenties. Here's a table containing the 25 best and 25 worst days in the Dow from 1922 to the present. As you can see, almost all of these extreme days occurred during dreadful periods of stock market history.

Investment advisors sometimes support a buy-and-hold strategy by catering to fears of missed opportunity: "If you missed the ten best days, your portfolio would have shrunk by flippity percent!"

Frankly, I'd have been quite content to be in cash during all of the time frames referenced in this table. More...

The bottom of the 1982 bear market was a major turning point for stock dividends. For more than a century, the market's dividend yield had averaged nearly 5%. But since 1982 the yield has essentially been cut in half, falling as low as 1.1% in 2000. (See the chart.)

What happened? In a nutshell, investors shifted their focus from income streams to price appreciation. As a member of the first wave of Baby Boomers, I explain this shift as a confluence of three things: More...

We all know about inflation, but how many of us factor inflation into our long-term investment expectations? Here's chart of the S&P Composite going back to 1871 with no inflation adjustment.

Now here's the same chart corrected for inflation. Economists would say the first shows "nominal" prices, the second "real" prices. If you study the two in alternation, you notice some striking differences.

But when you combine the two into a single chart, you instantly see what I call the Unreal Price Differential. From the 1871 to World War II, the occasional episodes of deflation kept nominal and real stock prices relatively aligned. After WWII, inflation has given nominal prices the illusion of superior long-term performance. However, when adjusted for inflation, post WWII prices are shown to be far less outstanding.

About those regression lines
The regression lines (exponential regressions on these semi-log charts) give us mathematically precise slopes representing price growth over the entire 137-year time frame. For nominal prices, the slope is 4.2%. For real prices, the slope is a mere 1.7%. Thus inflation accounts for the majority, 2.5%, of the apparent price appreciation.

New: I've now added a similar analysis of the Dow since 1900. The Dow nominal slope has a 4.9% annualized increase; the real slope has a 1.75% annualized increase. Inflation accounts for the 3.15% differential.

Of course, these numbers exclude dividends, which I'll incorporate into this analysis in the next update.

With so much happening yesterday, I missed posting the intraday volatility update. I've been tracking the Dow percentage spread between daily highs and lows exceeding our 8% red-flag threshold.

Over the 80-year period since 1928, the average volatility in the Dow is about 1.8%. There have been only 67 days when the intraday volatility exceeded 8%. That's right — 66 out of over 20,300 market days. If they were evenly spread, that would be about one 8% plus volatility day every 14.4 months.

Seventeen of them have occurred since September 29th. The Crash of 1929 had only eight. Another thirty followed during the ten-year Great Depression. Four were clustered around the Crash of 1987. Only two happened during the nasty 2000-2002 bear.

The current bear market has had a record-breaking nine consecutive days of 8% plus volatility (October 6 through the 16th). Second place goes to the Crash of 1929, with eight super-volatile days spread over a 14 market-day period (10/23/29 to 11/13/29).

So, where does this volatility lead us? These 67 manic-depressive days were almost evenly split (33:34) between up and down days. The range is astonishing — from a 15.3% gain in March 1933 to a 22.6% decline on Black Monday, the Crash of 1987. But if you combine the stats, the results are unremarkable. The sum of the 67 gains and losses is -3.1%. The average is 0.05%.

If you're into high risk trading, these high-volatility days are the ultimate challenge. For long-term investors, try deep breathing exercises, or (my favorite) pick up a copy of the Tao Te Ching.

Note: I've revised the charts for this article, shifting the annualized returns to the left so that the return value lines up with the year the lump-sum investment is made. The original version showed the return at the end of the investment period, which some readers found confusing.

Here's a sobering set of charts that will especially resonate with those of us who follow economic cycles.

Imagine that ten years ago you made a single, lump-sum investment in the S&P 500. How much would it be worth today, adjusted for inflation with dividends reinvested? Brace yourself: Your investment lost 44.7% for an annualized return of minus 5.9%.

The unemployment numbers and high-profile liquidations (Linens-N-Things, Circuit City, etc.) are sure signs of a recessionary downturn. But the one that grabbed my attention today is a business located near the McDonalds where I occasionally buy a "senior" coffee.

"Oskar Huber thanks you for 81 years" reads the sign over the entrance. You don't need a calculator to do the math: 2008 minus 81 equals 1927.

This business was an infant during the Crash of 1929 and was pre-schooled by the Great Depression. But 2008 marks its demise. Eighty-one years — that's close to a healthy human life span.

"Who wants to be a millionaire?" Regis Philbin asked when the popular TV show of the same name debuted in the United States in 1999. The program had originated the year before in the U.K. and eventually created a worldwide craze, with spinoffs in more than 70 countries, including places as diverse as Iceland, Kazakhstan, Nigeria, Thailand, and Uruguay. More...

Looking for hot trades? Do you get your tips from CNBC's Fast Money crew? Is Mad Money's wild man Jim Cramer your trading guru? And speaking of trades, did you know that earlier this year, CNBC's Maria Bartiromo, aka the "Money Honey," actually filed to trademark her nickname?

The airwaves are awash with real-time coverage of the markets. I could spend my entire waking life toggling between CNBC, Bloomberg, and now Fox Business News. If I'm watching Squawk on the Street but need to run to the store, no problem! I can catch the broadcast on XM Radio. Off to the gym? Every treadmill at my fitness center has a personal LCD TV attached. I can pace myself to streaming live quotes from the New York Stock Exchange. More...

These questions were asked during a Health and Retirement Study (HRS) to measure the financial literacy of Baby Boomers. While 84% nailed the disease question, only 56% could divide the lottery correctly. People who got at least one of the answers right were asked a bonus question: More...

These catch-phrases reveal two basic aspects of human nature: Our chronic self-absorption and our focus on the immediate. We spend most of our lives living for today with ourselves at the center.

But now science is beginning to reveal how this innate behavior threatens our retirement. Based on functional magnetic resonance imaging (fMRI), researchers know that certain parts of our brain are more active when we're thinking about ourselves. However, a recent Forbes magazine article mentions some preliminary research at the Stanford Center on Longevity with stunning implications for retirement planning. "When people are asked to imagine themselves in retirement, the parts of their brains that usually 'light up' when they think about themselves don't light up at all. It's as if they were thinking about a stranger." More...

I've just come from the stunning 3-D cinema version of Beowulf. In my former life as a Beowulf scholar, I would never have imagined our hero facing a monster with the seductive allure of Angelina Jolie — naked! However, I was even more surprised by the monster-sized refreshments at the concession stand, especially because I'm not a frequent visitor to the modern megaplex. I saw lone moviegoers struggling with family-sized tubs of butter-drenched popcorn. More...