At Contravisory, we relate the bear market of 2007-2009 to that of the 1973-1974 bear market.  The extent of the decline, investor sentiment, and the breadth of the collapse are very similar.  Naturally, we have been looking back to study data from that period to provide us with clues and signals to help navigate today's market.  One fascinating piece of commentary we uncovered originated from our own research publication, ContraSignals. 

It was August of 1975 and the market recovery was underway.  Coming off significant declines in 1973 and 1974, through June 1975 the market had posted six straight months of gains and recovered 29% off the low.  Investors appreciated the bounce but ultimately feared a resumption of the bear market.  June and July of 1975 saw the market suffer an 8% correction and investors were quick to call and end to the bull market.  Here are some of the comments that Ed Noonan made that month in our ContraSignals report:

"The long-sought and over-analyzed "pullback" in stock prices has finally stepped forward.  When the emotional tug to become fully invested was perhaps the greatest (June-July), prices have tumbled with conviction.  One of the most interesting aspects of the ongoing weakness has been the quick turnaround in enthusiasm to buy stocks.  Sentiment appears to be moving quickly in a negative direction.  Such sentiment is clearly rooted in the 1973-1974 debacle and should help to limit the severity of the correction."

"The current phase of weakness may well continue into the fall, but such behavior is necessary to preserve and strengthen the favorable price trends underway.  Moreover, we would treat such a period as an opportunity to unemotionally accumulate stocks."

Sound familiar?  Much like today, many are speculating that this correction marks a resumption of the bear market or the start of a "double-dip".  Investor sentiment is crumbling much like it did in 1975. 

The correction in 1975 would ultimately last one more month and correct 11% in total.  The market would subsequently rally to finish the year +31% and form the base of a secular bull market.  While no markets are exactly alike, human nature remains the same as it was in 1975 and the parallels in price action and investor sentiment are stunning.

Corrections such as the one we have experienced over the past two months are a normal part of a market recovery.  They strike fear into some investors yet others will treat them as a buying opportunity.  Only time will tell who will be right this time around, but using history as our guide suggests this is likely a good time to do some buying.

For a copy of our August 1975 market observations, feel free to email me at dcanal@contravisory.com

Have a great weekend!