“Wow Mr. Peabody, That’s a heck of a run in the Dow transports? Maybe a new bull market?”
“True Sherman it has been a nice run, but hold on, it’s not as rosy as one might think. To find out the truth we have to use math.”
“Ah come on, Mr. Peabody that whole “math thing”, jeez, that’s hard.”
Well, Sherman- let’s break it down, and see what we can learn in the process.
Let’s use the ETF – IYT as a proxy for the Dow Transports and let’s do some mathematical calculations:
The high close for the transports occurred on 11/28/2014 and was recorded at 165.33.
The most recent turn at the bottom occurred on 01/20/2016 and was printed at 118.91.
Using simple subtraction and taking 165.33 and subtracting 118.91 you get- 46.42.
Using division, now, stay with me Sherman, we divide 46.42 by 165.33, we get a decline of 28.01 percent. We will, as most would, classify this as a “Bear” market.
“OK Mr. Peabody.”
“Stay with me Sherman: the near term rally’s most recent high close of 03/21/2016 was printed at 145.10
Again, using subtraction 145.10 – 118.91 = 26.19.
Using that tricky division again, 26.19 divided by 118.91 (the low) reveals an upward move of 22.02 percent. A larger than 22 percent near term rally.
Wow, cool Mr. Peabody- “so if we use subtraction again: a 28.01 percent decline is offset by a 22.02 percent rally means we are just shy of 6% off the high, that a heck of a run, great.”
“Not so fast Sherman- we changed the denominator (the lower number when dividing) so the percentages are different because we used different variables.”
“This is what we must do: we take the high of 165.33 and we now subtract the most recent near term high of 145.10 and the formula looks like this (165.33 – 145.10 = 20.23). Now follow me Sherman, to get back to the 165.33 number the “market” would still have to rally 20.23 “points” or using division again, 20.23 divided by 145.10, we get 13.9 percent, which means the market still has to gain almost 14% to get back to that level, not the 6 percent you originally thought.”
“Geez, Mr. Peabody, so even though we rallied back 22% of the original 28% decline we still need and additional 13% rally from this point to get back to where we were.”
“That’s right Sherman, that’s the math.”
Geez, Mr. Peabody, “that’s complicated, so even though we rallied over 22 percent and only had a 28% decline we are still 13% off?”
“That’s right Sherman, add to that, we now have to predict how people interpret this information, and don’t even get me started on Central Bank intervention. It’s enough to make a grown intelligent man scratch his head- could you imagine what it does to an insecure, uneducated, nit who leans to the left?
That’s why the markets are no place for the ignorant, irrational, emotional, pompous and in Mike’s case, under medicated.”