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July 20, 2006
Crisis Events Can Be Bullish Once They End
My pals at Ned Davis Research (NDR) provided a reminder about how the markets respond well to crisis events. I'm not sure the latest phase of the decline that began in mid-May was necessarily triggered by the Mideast crisis but I think the blow-up in Lebanon does qualify as a crisis event.
NDR has identified 41 crisis beginning with the closing of the Exchange during WWI. The crisis events range in length from days to months but most have been anywhere form one day to a few weeks. On average, during the crisis phase, the DJIUA fell 5.7% with a media decline of 2.9%. A large percentage of the crisis events were related to wars and other foreign incidents. About 1/3rd of the crisis events directly involve either the Mideast or terrorism. The most severe declines among those crisis events were the 1973 Oil Embargo (-18.5%), Iraq Invading Kuwait (-13.3%) and 9/11 (-14.3%). Several events inthis group led to little or no negative reaction including the 1983 Beirut bombing, the 1956 Suez Canal Crisis preceding the 1956 Arab-Israeli War, the U.S. bombing of Libya in 1986, the start of the Gulf War in 1991 and several of the "lesser" recent terror attacks like the USS Cole, the Bali nightclub, and the London Train bombings.
Of equal interest to the generally negative reaction to crisis events as they happen is that the associated market decline has historically put in a near-term bottom for stock prices.....
In the 22 days following the end of a crisis event, the DJIA gains an average of 4.2%, the 63 day average return is 5.2%, the 126 day average is 8.9%, and the 253 day average return is 14.9%. It is worth pointing out that the standard deviation around those averages looks pretty high to my eyeballs although the median returns are quite close to the averages.
So apparently, crisis events can be a positive catalyst. Whether the current situation in the Mid-East qualifies is open to be debate. And I think you have to say that the current crisis remains ongoing so the rally off Tuesday's may not qualify in the end as part of the post-crisis period.
Nevertheless, I think this data reminds us that it is always bleakest at the bottom. So resisting the urge to throw in the towel when the pain in your gut reaches a new intensity remains very good advice.
If you want a copy of the spreadsheet with the data on each crisis event, please email or comment below.
Posted by Steve Birenberg at July 20, 2006 11:32 AM in Market
Cetv and ntli stocks are languishing with the present market's severe correction.How do you think these companies will do at the next earnings/conference report?
The emerging markets and media have been especially hard hit during this correction. Do you think these companies are likely to respond positively during any market rebound?
There is absolutely no change in my veiw on CETV. THe company's business is fine and the stock will recover storngly adn resume its long-term uptrend once the market settles down and the company reports its results. Remember that guidnace implies a very weak second quarter at Nova inthe Czech Republic so it is really the Spetember adn December quarters that will reveal the company's continuing strong growth.
NTLI is under pressure because announced a muchmore aggressive entry into the UK broadband market than analysts expected. Investors beleive that NTLI may lose customers and have to sharply lower their pricing. If that occured, free cash flow would come in under estimates for the enxt several years. NTLI is a value stock and everything rises on free cash flow, so this is bad news. I think the stock has overreacted but in such a lousy market environment it is easy to see why no one is willing to step up to meet the selling pressure. Keep in mind that NTLI has major shareholders who don't like to lsoe including RIchard Branson and William Huff.
I am sitting tight for now but NTLI needs a good quarter and confident and defensible guidance. The company could modestly lower guidance at this point without hurting the stock further if the outlook makes sense.