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
