Enough of the Charts-Based Crash Talk

One thing that investors have constantly been hearing these days is the notion that Dow charts and Dow patterns in 2007 are extremely similar to those from the same time frame in 1987. And as we remember, or as talking heads on CNBC have repeatedly pointed out in the last week, the most famous crash that occurred immediately after that run, famous Black Monday on October 19, 1987, could possibly repeat this year again. Why? Well, similar patterns, similar performance, similar indicators, similar things that led to that crash…so, of course, we are on the route to a major crash, or at least a major correction this year as well. But let's see.

Looking at the chart below, we can see that Dow Jones indeed performed similarly during 1987 (immediately prior to crash) and 2007 year-to-date.

Doesn't it look the same? Amazing. Isn't history repeating itself as always? Wow.

These are the things that were highlighted everywhere last week- the things that spooked investors right before, and especially on the 20-year anniversary date, October 19, 2007. As investors draw comparison on price patterns and technical analysis, human behavior, psychology and blood rush, caused fear, jitter and remarkable desire to fulfill the chart pattern and "crash" the market exactly on its crash anniversary date. Not day before or after- but exactly on that day.

Yup, chart patterns above certainly look similar, and one could certainly argue that it's a cause for a sell off. But technical analysts, chart "patterneologists", and talking heads who hyped the "need-to-crash-based-on-historical-price-relation-performance" appear to have overlooked and failed to realize one thing - the way these price patterns were implemented. Surely the chart above gives one a thing or two to consider (if not more than that), but if we look at the relative performance of Dow Jones we can see something different. Look at the chart below.

When we look at the relative performance comparison between Dow Jones this year and Dow Jones twenty years ago, suddenly we see a completely different looking price patterns and different looking chart. What's going on? Simply, before market collapsed in 1987 it was up more than 40% from beginning of the year to the August high! 40 (forty) percent! That alone is a cause for correction. One should rather ask was the Black Monday really a crash or just a plain, simple, regular correction. I mean 40%, for index?? So, 25% down is really just a correction- market was still up then- even after that correction it was up for the year, but closer to its regular average annual returns. And look at the Dow this year on the chart- really, slightly up, but mostly sideways. Completely two different market circumstances. While Dow in 1987 was up 40% by August, Dow was up just 10%.

So, although some might have seen the patterns leading to crash in the first chart above, failing to realize the actual market performance for the year, and failure to do the actual performance comparison, rather than just how the chart "looks", caused many to sell and short the market. It's very obvious that many have not compared the same things here. So, just like it will continue raining in October for as long as we know, the markets will continue inching higher, year after year. So, get ready, as you know what's coming after a big "crash", as CNBC pointed out often last week - an explosive comeback.

Comments

[EL-GRECO:]

I'm glad you made the point; I don't read this type of article often enough. What is more astonishing is the amount of valuable air time that is given to predictions. Essentially the media is giving every Tom Dick and Harry talking head the chance to be right about some forthcoming event, by allowing them to rattle off prediction after prediction which eventually leads to the "right call". And after bombarding viewers with daily 1987 anniversary crash televised segments, the media expresses surprise that the market should tank on the anniversary date. I would suggest that financial TV, the way it is presented today, has a hand at sustaining volatility in the markets, and they just love the power it gives them.

2007 Oct 31 06:36 AM

[Beris:]

Hey, El-Greco,

Thank you for reading, and I am glad you spent time reviewing this article. I couldn't agree more with you about media's desires to spin things and to enjoy that power the airwaves give them. And also, I agree about your statement that million of predictions eventually leads to the "right call". Good comments.

2007 Nov 02 02:21 PM