How low can the stock market go?
By Mary Gahan, January 27, 2003

If you think that London's stock market has hit the bottom perhaps you had better think again. 

Followers of the Gann theory are certain that if the leading index of blue-chip shares falls 50% from its peak, then it will fall by half as much again. 

That would take it from a high of 6,930 points, last seen in December 1999, to just 1,733 points - a level not seen for 15 years. Fred Stafford, a strict adherent of the Gann theory, explained that, to trigger such a fall, it is not enough for the FTSE 100 to dip below the half-way level of 3,465 points as it did during the trading day on Monday. 

He told BBC News Online that there had to be a trend. In other words, the market would have to close below 3,465 points, then close above that level before closing down below it again. 

This process could take days or it could take weeks, but if it happens then, so the theory goes, the second big fall will follow. 

"It's not a question of expecting, it will definitely happen," says Mr Stafford, who runs Gann Management, based in Cheshire. 

History repeats itself 
Although he is confident that the trigger would lead to the second fall, Mr Stafford will not predict whether the first level will actually be breached. 

The Gann who came up with this theory - and many others - is one William D Gann, a successful Wall Street investor in the 1920s who applied mathematical principles to trading shares. Stock market historian David Schwartz is aware of the Gann theory, but the system he follows is that the past often repeats itself. 

"We live in very, very interesting times," he says of the current collapse in stock prices. 

Mr Schwartz explains that we have had 25 downturns in the past century; a downturn is a drop of more than 15%. On 12 of those occasions prices stopped falling after a decline of 15%-49%. And the four bigger declines saw prices fall by 50% or more. "But each of these was associated with a potentially catastrophic event," says Mr Schwartz. 

Impossible to predict 
One of these downturns was in the years leading up to World War II when shares fell by 60%. Another was in the early 70s when there were oil shortages and a Labour government seen as antagonistic towards business. Between 1972 and 1974 shares fell 74%. "We are now down perilously close to the 50% level. 

"History tells us that if you believe that we are in a normal downturn and there are some war fears that are going to blow over very soon, then history tells us that this is as low as you can get. 

"But if you believe that there are catastrophic events ahead of us then we are heading for a greater dip. 

"The problem is nobody knows what, definitely, is going to happen."