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Remembrances Of The 1973-1974 Bear Market (Preview)

By Lawrence G. McMillan

At the beginning of 1973, the Dow (no one paid much attention to $SPX back then) made a new all-time high, trading up to 1067.  The Barron’s Roundtable, a survey of top money managers and brokerage firm analysts, was published at the beginning of 1973 under the (now infamous) headline, “Not A Bear Among Them.”  They were all bullish.  President Nixon declared that the Vietnam War was over (although it didn’t wind down completely until 1975).  However, stocks had a mind of their own (then, and now), and the Dow began to immediately decline. 

That was the first market I traded seriously, and I was short1.  Please refer to the accompanying chart of the Dow while reading this article.

The market immediately became quite volatile.  There were no implied volatility measures at that time, because the CBOE had not yet started trading (that would come a few months later, in April 1973).  But realized volatility jumped from 10% to 23% over the first six months of 1973.  The market was declining steadily and fairly rapidly over that time period, but the counter-trend rallies were large, too.  By late June, the Dow was at 875.  After a brief rally, it fell to 845 by late August.  That was a decline of 20.9%...

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