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The warning shots of 2007
Steven Saville

For a market analyst there is an irresistible temptation to seek out one or more historical parallels to the current situation. The idea is that clues about what’s going to happen in the future can be found by looking at what happened following similar price action in the past. Sometimes this method works, sometimes it doesn’t.

Assuming that the decline from the January-2018 peak is a short-term correction that will run its course before the end March (my assumption since the correction’s beginning in late-January), the recent price action probably is akin to what happened in February-March of 2007. In late-February of 2007 the SPX had been grinding its way upward in relentless fashion for many months. The VIX was near an all-time low and there was no sign in the price action that anything untoward was about to happen, even though some cracks had begun to appear in the mortgage-financing and real-estate bubbles. Then, out of the blue, there was a 5% plunge in the SPX. On the following daily chart this plunge is labeled “Warning shot 1″.

After the February-March ‘hiccup’ the SPX resumed its bull market. Both the stock market and the economy were believed to be in good shape, with the problems that had emerged in the realm of sub-prime mortgage lending generally considered to be contained to that relatively-unimportant part of the economy. No less of an authority than Ben Bernanke assured us that these problems were, indeed, contained.

The upward trend continued until mid-July, at which point another ‘out of the blue’ plunge began. This time the decline lasted 5 weeks and wiped 11% off the SPX. On the following daily chart it is labeled “Warning shot 2″.

The July-August decline was taken more seriously by almost everyone, including the Fed’s senior management. It was taken seriously enough, in fact, to prompt a reversal in the Fed’s monetary policy. The Fed entered rate-cutting mode.

During the weeks following the August-2007 low there was still widespread optimism. The overall economy was supposedly still strong, the Fed was being supportive and, as everyone knows, you should never fight the Fed.

The SPX went on to make a marginal new high in October-2007 and then commenced a bear market that over the ensuing 17 months would result in a loss of almost 60%.

The SPX was more stretched to the upside in January of 2018 than it was in February of 2007 and the more recent plunge was twice as big, but we could be dealing with Warning Shot 1. Also, this time around there may not be a second warning shot.



I have been a fulltime professional speculator since 1998 and the owner of a subscription-based web site about the financial markets since 2000. The web site is called “The Speculative Investor”, or “TSI” for short.

In an average week, TSI subscribers receive two reports: a Weekly Market Update on Sunday and an Interim Update on Thursday morning (NYT). The Weekly Update typically has 3000-4500 words and 10-15 charts, while the average Interim Update is about half that size. As well as containing information about the gold, currency, stock, bond and commodity markets, these reports regularly include discussions about macro-economics. The economics-related discussions are from an “Austrian” perspective, because I’ve found that the Austrian School is the only school of economics that is consistently logical and explains how the world really works.

TSI subscribers also get access to a list of stock selections. The TSI stock selections have provided very good long-term returns; however, due to the highly speculative nature of the stocks I tend to focus on, my year-to-year returns have been ‘lumpy’, to put it mildly. For example, since 2000 my own equity portfolio, which comprises many of the stocks covered at TSI, has had six triple-digit years (years when the portfolio was up by at least 100%, without using any debt-based leverage and maintaining a cash reserve of at least 20%) and two years of 50%+ losses. The year-to-year ‘lumpiness’ of the performance that goes hand-in-hand with my focus on relatively risky (by traditional standards) equities will make the TSI stock selections unsuitable for many people.

The price of a TSI subscription is US$240/year or US$25/month.

The TSI Blog was created in 2014, mostly for fun, but also to promote the TSI subscription service and to be a venue for me to make public comments that for one reason or another aren’t suited to the subscription service.


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