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Scary chart draws parallels with 1929

  • Making the rounds on trading desks is this chart of the DJIA (DIA) of the last 18 months superimposed on a chart of the index during the same time frame in 1928-1929. The short version: If form holds, the market is set for another epic crash.
  • In the more nuanced version, the chart says little except for again proving the hardwired tendency of the human brain to see patterns where none exist, and one is reminded of similar exercises over the past few years making the case for the Dow breaching its financial crisis lows.
  • Technical guru Tom DeMark, however, is starting to believe:  “Originally, I drew [the chart] for entertainment purposes only ... Now it’s evolved into something more serious.”
  • Tom McClellan: "There is no guarantee that the market has to continue following through with every step of the 1929 pattern. But between now and May 2014, there is plenty of reason for caution.”
  • Large-cap ETFs: SPY, QQQ, SH, DIA, SSO, SDS, PSQ, IVV, SPXU, UPRO, VOO, SPLV, TQQQ, QID, PRF, SPXL, SPXS, RSP, DOG, SQQQ, QLD, DXD, RWL, EPS, UDOW, SDOW, USMV, DDM, VV, SCHX, IWB, NY, SPHB, BXUB, QQEW, QQQE, JKD, FEX, VONE, TRND, SFLA, EQL, BXUC, ROLA, QQXT, BXDB, EEH, ONEK, SPXH, TRSK, FWDD, EWRI, TNDQ, PXLC, LGLV, ALTL, SYE
Comments (31)
  • bbro
    , contributor
    Comments (9445) | Send Message
     
    "hardwired tendency of the human brain to see patterns where none exist".....especially if
    you are a doom and gloomer....tends to be a daily exercise
    11 Feb, 10:10 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2499) | Send Message
     
    The 1929 crash was caused by a macro shock. Unless you are expecting a macro shock on a similar scale to the great depression, its silly to think that the market is going to collapse just because the charts look similar.
    11 Feb, 10:14 AM Reply Like
  • Ordinary Average Guy
    , contributor
    Comments (779) | Send Message
     
    Mike, You are probably right. I am not going to even make the effort to back check economic indicators that existing in 1929, but they probably had much worse unemployment, and a lot of debt. US debt (inflation adjusted) was probably much worse than today. The stock market in 1929 unlike today, was way overbought too. I'm guessing that they had a lot of highly inflated bubbles ready to pop when the macro shock triggered the market collapse. You cannot forecast a macro shock event.
    11 Feb, 11:32 AM Reply Like
  • Tack
    , contributor
    Comments (12964) | Send Message
     
    Just one fact:

     

    In 1929, margin requirements were 10%. That meant 9:1 leverage, which makes today look like a joke, despite all the ballyhoo about margin debt being at all-time highs.

     

    P.S. As a percentage of GDP margin debt as been falling ever since 2000.
    11 Feb, 11:35 AM Reply Like
  • Cynical Rhino
    , contributor
    Comments (152) | Send Message
     
    Tack said:
    P.S. As a percentage of GDP margin debt as been falling ever since 2000.
    .
    Based on Hussman's data, this is completely inaccurate.
    http://bit.ly/LUaGgP
    11 Feb, 12:10 PM Reply Like
  • Tack
    , contributor
    Comments (12964) | Send Message
     
    CR:

     

    Maybe, he needs a better source for his data: http://tinyurl.com/lxu...
    11 Feb, 12:16 PM Reply Like
  • Cynical Rhino
    , contributor
    Comments (152) | Send Message
     
    You could argue that we have not since exceeded the percentage peak from 2000 but we have had subsequent peaks in 2007 and right now. All of the graphs from your search bear this out. I linked to Hussman since he had the most recent handy graph.

     

    Given the normal revisions of GDP, we are probably at the 2000 peak right now within the margin of error that we can count on in real time. Ritholtz argues (http://bloom.bg/17cIXw6) that the margin percentage isn't a big deal and you clearly have an opinion as well, but let's try to keep to a common set of facts.
    11 Feb, 12:43 PM Reply Like
  • bigfatbrain
    , contributor
    Comments (34) | Send Message
     
    Percentages? 16,400 to 13,200 is a drop, 375 to 200 is a plummet. Unless you're retiring tomorrow, and never expect to have fresh capital to deploy, a drop to 13,200 is called OPPORTUNITY. I'd love a return to 6,800. Doubt we'll see it again.
    11 Feb, 10:16 AM Reply Like
  • ParisJOM
    , contributor
    Comments (188) | Send Message
     
    I had the "privilege" to do exactly the same exercise in the trading room of HSBC in late 2007. A lot of the traders were amazed, impressed and intrigued, and most of the guys I shared it with kept a copy handy and updated it regular. When the financial crisis came into full swing in 2008, several of the guys were fully expecting (almost with some sort of morbid delight) the seemingly predictive power of this exercise.
    I am not attempting to ascertain that these chart comparisons do indeed hold any predictive powers, but I was indeed well impressed with the uncanny repetitive behavior of the market (ie 2008 repeating/imitating the great depressions big sell off).
    I am probably not mathematically inclined enough to even begin to scientifically demonstrate whether or not these chart similarities can be predictive or are mere coincidences, and I know not even if any scientist could demonstrate such.
    What I do know, however, is that it is a good idea for anyone to keep these scary charts on their wall at their trading station, at least just to remind them of how seriously panicked and severe the market can become from time to time and, above all, to have a plan to seriously profit from such a severe move in the market, should one be so fortunate to have this opportunity appear in their lifetime and be prepared to fully take advantage of it.
    11 Feb, 10:30 AM Reply Like
  • bbro
    , contributor
    Comments (9445) | Send Message
     
    The business cycle in late 2007 and early 2014 are like night and day.....
    11 Feb, 10:42 AM Reply Like
  • Tack
    , contributor
    Comments (12964) | Send Message
     
    Hilarious. The 1929 parallels were dragged out right after the recovery started in 2009, ostensibly to demonstrate that it would all collapse to new lows. Guess they needed some dusting off.

     

    The folks who subscribe to this kind of nonsense actually believe that curve-fitting causes the future, rather than merely reflecting the past.
    11 Feb, 10:47 AM Reply Like
  • Chris Lau
    , contributor
    Comments (1626) | Send Message
     
    What's the statisical correlation coefficient of the price movements between 1928-29 and current dow period? If it's very high, then consider this: HFTs are using data from 1928-9 to make trading decisions today. Therefore the chart is parallels are valid, and therefore the predicted drop will come true.
    11 Feb, 10:59 AM Reply Like
  • Seppo Sahrakorpi
    , contributor
    Comments (1886) | Send Message
     
    So once any two parallel patterns have been identified they become a self-fulfilling prophecy?
    11 Feb, 11:08 AM Reply Like
  • ParisJOM
    , contributor
    Comments (188) | Send Message
     
    Anyone here who has not seen the documentary on Paul Tudor Jones, should probably do so, even for the entertainment value of this amazing story and the hard core personality of the guy. He paid attention to these things very seriously. Sure maybe a mere coincidence made him extremely successful in a "once in a life time" coincidence, ... but maybe not.
    I would obviously not count on this "scary chart" stuff to plan my portfolio strategy, but I will definitely keep these charts on my wall and have a "doomsday strategy" ready to profit from.
    11 Feb, 11:13 AM Reply Like
  • Brian Bobbitt
    , contributor
    Comments (1899) | Send Message
     
    Just a hip-shot with my morning coffee. I would not go out and use a single parallel to make serious trades.
    I do feel, that if one has a lot of his hard earned money (or even a lot of not so hard earned) that one would be wise to hedge his investment when it appears, feels like, or seems doom is impending.
    This is what hedging is, and now there are plenty of ETF's to hedge with. ( I would say, however, that if doom and gloom hits, I would be exiting all my holdings first, and hedges second)
    Stops also allow sleep with no dreams and easier digestion if you want to walk away from your monitor once in a while.
    The market is always going to amaze you. Look at it this way: the market is like a hockey game, constant frenzy, penalties, and when one does score a goal, it is usually a surprise to all, players, fans and especially the announcer. (The announcers, now there's a breed apart.) The stock reporters, gurus, chartists and sports announcers are all surprised when something happens.
    It is what they are there for, what they are all about, finding news where none exists is their stock in trade.
    Our markets are acting just fine. (1929 the markets were totally insane from what I have read)
    Look at the stocks, nicely rising, gold and other PM's, tagging along re-pricing themselves after storms to where they should be to keep up with inflation and bouncing along up and down when any stimulus is applied or reduced.
    You can take your charts, says I, and use them LAST after you have opened every other door to where you want to go.
    And the charts, (which I call tea leaves) are very important, but as we have all seen many times in the past, patterns are for curtains and dresses, not investors.
    Capt. Brian
    The Lost Navigator
    11 Feb, 11:29 AM Reply Like
  • rskaggs
    , contributor
    Comments (4) | Send Message
     
    Looks like the percentage moves on the left and right scale of the chart are not ientical.
    11 Feb, 11:53 AM Reply Like
  • vgatahvi
    , contributor
    Comments (8) | Send Message
     
    Not gonna happen...I've got my lucky rabbit's foot.
    11 Feb, 11:54 AM Reply Like
  • taarnawolf
    , contributor
    Comments (28) | Send Message
     
    I hate to seem ignorant, but I have to learn....

     

    but WHAT WAS the macro shock (event) ?
    11 Feb, 12:12 PM Reply Like
  • Newbie trader
    , contributor
    Comments (174) | Send Message
     
    @taatnawolf
    A bountiful harvest that drove prices down. Surprise.
    13 Feb, 12:08 AM Reply Like
  • Robert Myers
    , contributor
    Comments (149) | Send Message
     
    And the most feared and loathed bull market in all of the history of Wall Street marches on. Keep that fear out there. It's good for business, apparently.
    11 Feb, 12:33 PM Reply Like
  • dividend_growth
    , contributor
    Comments (2879) | Send Message
     
    This comparison is so laughable:

     

    16000 to 13500 is of totally different magnitude than from 375 to 200.

     

    Anyone who takes that crap seriously has failed high school math...
    11 Feb, 02:10 PM Reply Like
  • palsal
    , contributor
    Comments (2) | Send Message
     
    Mr(s) taarnawolf,The macro event was the great depression of the 1930's. So far I've explored some of the active areas on the Seeking Alpha alert and I haven't seen the chart referred to.
    11 Feb, 02:15 PM Reply Like
  • taarnawolf
    , contributor
    Comments (28) | Send Message
     
    It's Mr.

     

    I probably should have extended my question to wit:

     

    ....(that CAUSED the Market Crash) ?
    11 Feb, 08:21 PM Reply Like
  • Newbie trader
    , contributor
    Comments (174) | Send Message
     
    @palsal
    The chart is old news, it has been around since last year. SA just didn't have that information and traders who knew just didn't pass it around much.
    13 Feb, 12:12 AM Reply Like
  • Scepticofall
    , contributor
    Comment (1) | Send Message
     
    Saying the Great Depression was the macro shock event, is like saying snow causes winter. The Great Depression was a result of other actual events, like economic manipulation by central banks, and poor government decisions. We need to be specific, and research the underlying actions that cause these events, in order to learn from them. Broad generalizations, such as those made by MSM, do not educate, only confuse.
    11 Feb, 03:40 PM Reply Like
  • awakeinwa
    , contributor
    Comments (308) | Send Message
     
    If you believe Milton Friedman the great depression arose precisely because the central bank did not intervene to increase liquidity allowing such a depression to occur. If a second great depression were to occur, it would have in 2007-09. The key feature of such a collapse is too much paper (highly leveraged) following too few goods. CDOs and derivatives are significantly restrained today and reserve capital requirements are non-trivial despite Europe's attempts to slacken them. In the USA where most of the last overleverage occurred, there is no froth in sight. There are no cheap loans to chop up and tranche resell, junk bonds remain fringe, deflation is prevalent hovering a little above 1% - there simply isn't any overhang to hang this chart on in the real macroeconomy
    11 Feb, 05:03 PM Reply Like
  • bbro
    , contributor
    Comments (9445) | Send Message
     
    So lets see if we are at 14,000 on the Dow by April 2nd...current options pricing give it a 1% chance...
    12 Feb, 09:17 AM Reply Like
  • Bandits1
    , contributor
    Comments (2) | Send Message
     
    And Wall Street craps its pants if any threat to an easing of QE is made. Well if you beleive this nonsense can continue infinitely or you believe energy will become plentiful and cheap then go ahead continue to bet on an infinitely rising market in a finite world.

     

    I guess there are only so many "ghost cities" freeways and trains lines to nowhere with which China can stimulate their economy...16 trillion of printing since 2009. Now the tables are turned, if China sneezes the world catches every disease known to man. Then again the cornucopians will believe China can continue 10% growth indefinitely or a crashing China or EU can be shrugged off by Wall Street.
    12 Feb, 09:04 PM Reply Like
  • Tack
    , contributor
    Comments (12964) | Send Message
     
    B:

     

    "...go ahead continue to bet on an infinitely rising market in a finite world...."

     

    Thomas Malthus made your argument 216 years ago. It seems his pessimism was misplaced, as is your own.
    12 Feb, 10:41 PM Reply Like
  • Bandits1
    , contributor
    Comments (2) | Send Message
     
    There is an old saying.....
    It's impossible to get someone to understand something, when their livelihood depends on them not understanding.
    ....and your biggest failing is not having a clue about the exponential function....Al Bartlett
    13 Feb, 01:09 AM Reply Like
  • Amerlafrance
    , contributor
    Comments (491) | Send Message
     
    squiggles that look similar drawn to differeent scales. A story for suckers.
    13 Feb, 11:14 PM Reply Like
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