Ominous Parallels to the 1929-1930 Era
October 2, 2009
grow old within a small circle of ideas, which they have not
discovered for themselves. There are perhaps less
wrong-minded people than thoughtless.
- Marquis De Vauvenargues, 1715-1747,
One of the most horrendous corrections the Dow has ever been
through began in Sept 1929 and appeared to end in Nov 1929.
In this short time period, the Dow shed roughly 50%. This
move was almost repeated exactly in 2008, when the Dow
dropped In Sept from 11600 to roughly 7550 by Nov 2008, the
only difference was that the Dow shed 34% instead of 50%.
The bottom In
Nov 1929 proved to be a false bottom just as the bottom in
Nov 2008 turned out to be a false bottom.
From its low
of roughly 190 (Nov 1929) to its high of roughly 300 in
April 1930, the Dow tacked on 57%. The current move that
started in March 2009 is strikingly similar; currently, the
Dow is showing a gain of roughly 47%.
This chart clearly illustrates the false bottom the Dow set
in Nov 1929. The bottom in Nov 2008 failed and the Dow put
in what appears to be bottom in March 2009. What remains to
be seen now is if the Dow will follow a similar path
downward, where each so called bottom eventually was taken
out until the Dow lost 90% of its total value. Time will
tell, but it does appear that the Dow is following this old
pattern rather closely.
Dow now trades past the 9800 on volume that is below 8
billion shares, it will probably be a clear warning signal
that a very strong correction is about to occur. Thus
traders willing to do some extra work should monitor these
ranges closely. Risk takers can short stocks like AIG
(especially AIG, short via the purchase of puts), LEN, etc
if the Dow trades to the above ranges on low volume.
markets have gotten so ahead of themselves, we are going to
wait for a decent to strong pull back before we open any new
positions, unless we specially issue entry points for
certain stocks. Our risk to reward models are giving of
extremely high risk readings and when this happens it is
prudent not to go against them. Market update
Sept 15, 2009.
and discipline are called for now for the herd is turning
more and more bullish, and it is never wise to follow them.
Leaders always have to make difficult choices; they have to
look in a direction that is opposite to that of the herd, a
direction that the majority will view with distaste.
to reward models continue to issue very high readings and
are close to setting new records indicating that jumping
into the market now is not a wise choice. It's time for
traders to start keeping a diary again; this time instead of
dealing with fear as was the case late last year and early
this year you are going to be dealing with euphoria. You
will see that the result is the same and that is why we have
repeatedly stated that trading based on emotions is a
perfect recipe for disaster. When it comes to trading,
there is no place for Joy/euphoria and even less place for
fear. Be a practical trader not an emotional one.
Market update Sept 22, 2009.
always going to be some differences, the Dow could on a
percentage basis rally much higher as the number of market
participants has increased by at least a factor of 100.
Current circumstances are worse now than back in 1929, at
least at that point in time the U.S. did not have a deficit
of 11 plus trillion dollars and growing on its back. It was
the leader in manufacturing and consumer spending did not
account for over 70% of the GDP as it does now. One has to
understand that if spending accounts for such a large part
of the economy then something has to give sooner or later
whether it is now or 10 years later. Consumer spending
creates nothing of value; a long term foundation of growth
can only be created by investing in capital goods and not by
taking on more debt. An economy whose foundation is based
on debt can only keep growing by taking on more debt,
eventually you are going to run into a brick wall and
everything will fall to pieces and that's exactly what
happened. Going forward we are still trying to use to debt
to get out of this hole, which means that the next
correction is going to be even more severe as there is
nothing to support the foundation but paper bricks. China
continues to invest very heavily into capital goods (new
infrastructure, new manufacturing plants, new power plants,
etc.) and this why it is destined to take the title from the
U.S just as the United States took the title from Great
Britain and will eventually hold the number 1 spot as the
largest economy in the world.
If the Dow
follows this path, then from low to high this pattern
suggests that the Dow could shed 90% of its value. The
Dow’s all time high is roughly 14000, thus it would have to
drop to satisfy the above pattern. We are not stating that
the same exact pattern has to be repeated but if one looks
at the facts the current situation is actually a lot worse
than it was back in the 1930's, so this is something to keep
in mind. What we are ready to state is that we have not seen
the worst yet and that there is a very good chance that the
lows of March 2009 might not hold.
Remember that the Dow put its 1st bottom in Nov 1929, what
later turned out to be a fake bottom. 13 years later (1945)
after putting in a long term bottom at 40 the Dow was still
unable to test 190, the first so called bottom in this very
massive correction. Only towards the end of 1945 did the
Dow finally muster the strength to trade past 190.
As we have
always stated every disaster, and we mean every single
disaster is nothing but an opportunity in disguise waiting
to be discovered. When the Dow dropped down to 40 in July
of 1932, it represented a once in a life time opportunity to
become a multimillionaire with just a few thousand dollars.
No one can time the exact bottom thus if one started
purchasing at any time around April of 1932 (note the market
dropped another 45% from roughly 60 to 40) one would have
done still extremely well. Even if one bought at 90, 50%
higher one would have still made a fortune. Looking at our
long term charts we note that the Dow was flashing a series
of extremely large positive divergence signals from roughly
the end of March 1932. We have saved this pattern and kept
it in a safe place, thus if this pattern ever manifest
itself in the future we will be ready to issue what we would
term the mother of all buy signals. Right
now going forward our focus has to be on what might end up
being termed the father of all sell signals.
fact that the housing crisis is far from over and that the
commercial sector is now starting to fall apart, the economy
continues to shed in excess of 200,000 Jobs a month,
Americans are drastically cutting back on their expenditures
and the threat of hyper inflation continues to loom very
strongly in the near future, it is very hard to see how a
new bull market could begin. The story below just hit the
news wire, and it clearly illustrates Americans have
embarked on a new long term path.
slashed their borrowing in July by the largest amount on
record as job losses and uncertainty about the economic
recovery prompted Americans to rein in their debt.
Economists expect consumers will continue to spend less,
save more and trim debt to get household finances decimated
by the recession into better shape. However, such action is
a recipe for a lethargic revival, as consumer spending
accounts for 70 percent of economic activity. The Federal
Reserve reported Tuesday that consumers ratcheted back their
credit by a larger-than-anticipated $21.6 billion
from June, the most on records dating to 1943. Economists
expected credit to drop by $4 billion.
We have a
long term trend change here, and such changes never end
quickly, such trend changes usually last for several years.
Again another subtle sign that things could get
significantly worse in the years to come as our economy is
funded by consumer spending.
that suggest a long term bull is not in the marking are
general has been concentrated in just a fistful of stocks,
for example, on many days AIG has accounted for over 30% and
in some instances 40% of the total volume traded. Other
large volume generators are Fannie mae and Freddie Mac.
This is not a problem in the short and intermediate time
frames but long term it means the trend is not sustainable.
compelling indicator is Global trade; Japanese exports are
still off by 37% from their peak. Toyota the largest car
maker in the world announced for the 1st time in over 70
years that it will be shutting down an assembly plan.
Consumer confidence continues to fall and this is bad news
as consumer spending accounts for over 70% of our GDP.
volume day for the past 30 days occurred on the 1st of
September and the 2nd highest volume day took place on the
17th, the common factor is that markets closed in the red on
both days. This indicates that smart money was basically
taking money of the table. This fact becomes more evident
when one takes into account that the Dow ended the day on a
negative note after putting in a new 11 month intra day high
on the 23rd of September. If the Dow closes below 9600 on a
weekly basis it will have confirmed that it has entered into
a corrective phase. Volatility readings have shot past 1000
and so traders should expect extreme action on both sides of
the market (up and down). As the Dow has taken so long to
correct, this correction is going to most likely be the
strongest one the Dow has experienced since the start of
this rally (March 09).
Extracted from the Sept 2009 Market update
appears to have topped on the 23rd after trading as high as
9917 and ending the day on a negative note. Such an
occurrence is called a key reversal day and usually marks
the beginning of a corrective phase. If the Dow does not
trade past 9600 soon and for a period of at least 5 days,
then the odds favour that this correction is going to start
to intensify. Our outlook for now (based on the current
pattern) calls for a correction and not a crash. There is
still a pretty decent chance that the markets will rally to
new highs after this correction ends. However, we will be in
a better position to determine this when and if it trades
below 9000. Taking a longer term view we eventually expect
the Dow to take out its March 09 lows and resume its
downtrend. We will discuss this in more detail in future
more things to alarm us than to harm us, and we suffer more
often in apprehension than reality.
- Seneca, 4 B.C. � 65 A.D., Spanish-born
Roman Statesman, philosopher