About That 'Scary' 1929 Graph

Includes: DIA, QQQ, SPY
by: RedWaveResearch

The lead story on MarketWatch this morning is hyping a graph showing a "scary parallel" between the Dow Jones' performance in 1928-29 with the market's performance since July of 2012. By distorting the scale, the author appears to want to either warn you or scare you about where the market is heading. There is a whole cottage industry of investment newsletters that essentially attempt to frighten people into buying their newsletter to learn how to protect themselves. I'm not familiar with any of the parties mentioned in the article and only peripherally aware of the author, so I'm not making any allegations against anyone associated with the graph or the article, but let's look at the graph as presented.

That does look pretty damning. But take a look at the scales. They have been constructed to make a point, not to necessarily provide an illuminating argument. I pulled the daily price data on the Dow Jones index from 1928 and 1928 from this site. I then took daily price information from July 1, 2012 through the present and scaled both into percentage changes. This is the same data set used in the graph, according to the notes on the graph. By examining the percentage change in the index during these two time periods, we see a very different story.

Looking at the chart in this manner, there does not appear to any relationship between the two time periods. My graph does not generate website clicks or sell newsletters though. I'm not suggesting that we don't have real problems in our economy and that there is not downside risk in the stock market. The reality is there is always downside risk and no one knows what is going to happen over the next six to twelve months. I am suggesting it is important to study charts/graphs and determine if information is being presented in a way intended to enlighten the reader or mislead the reader. People can make their own determination on the "scary parallel" graph, but I know where I come out on the issue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.