IBD: 1930s DOW vs NASDAQ Correlation

This weekend, Investors Business Daily re-published a chart comparing the NASDAQ since 2000 to the Dow Jones Industrials from the 1930s.  I had stopped using the chart because the Dow staged a much more linear recovery in the 1930s compared the choppy and meandering NASDAQ.  However, the correlation worked well in anticipating a final top.  The 1937 and 2007 tops line up relatively well. 

If the analogy were to continue, last week's sell off should mark a temporary bottom, with the overall market staging a dramatic rebound.   After the initial surge, the market will basically stay in a trading range until it re-tests the recent lows over the next 12 to 24 months.   The next two years will be a tough environment for investors, a better one for traders.

I have re-produced the NASDAQ vs DOW 1930s chart below (click to enlarge).

Source: Bloomberg

Comments

[bulbs:]

I'm still not convinced. I believe there are some other economic forces that are behind this correction

2008 Oct 13 09:57 AM

[John Lounsbury:]

Two comments:

1. The past is prologue.
2. This time is different.

I think both apply to the current situation. Obviously, the two histories compared have some basic similarities. Both had declines from tech bubbles that consumed 70-90% of their market's value. Both were followed by financial system meltdown.

What is different are the timelines. In the 1930s, the financial meltdown occurred immediately after the tech bubble (1-3 years). In the 2000s the financial crisis was delayed seven years.

It may be more coincidence than direct relationship that makes the two charts overlay. It is very possible that the two charts may diverge substantially going forward.

What scenario might evolve that would keep the 2000s chart tracking the 1930s, 1940s and 1950s?

1. We get a multimonth rally inspired by stabilization of worldwide credit markets.
2. Next there is some pullback and consolidation as the effects of the financial meltdown are digested by the world economy.
3. Following the above events, a new economic expansion begins, stimulated by the growth of new energy systems and infrastucture investment.
4. Finally, a new era of high productivity growth follows, stimulated by abundant cheap energy, efficient new infrstructure and growing economic power in emerging markets.

2008 Oct 13 11:27 AM

[Al-USA:]

The other force behind the financial crisis is the wild-west financial speculative $70 trillion derivatives market. The Lehman bankruptcy put this $70 trillion derivatives market into a falling domino effect that threaten to bring down the global financial system. That is why Europe did not let their institutions fail, b/c it would bring down the $70 trillion derivatives markets which would obligate the counter parties to cover or settle their (insurance) derivatives and that would be a "problem" b/c who has $70 trillion?

More information on the money creation process below:
Indeed, we do not need any intermediary banks except to perpetuate the strangle-hold the elites of the elites have on the country. I don't remember who made this quote but it went something like this:

Give me control of the money creation structure of a nation, and I don't care who makes its laws.

This crisis has exposed the now not so "invisible hand" of the market...

I recommend the link below for a more thorough explanation of the questions, "where does money come from?".

video.google.com/video...

2008 Oct 14 01:29 AM