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There are eerie parallels between the stock market’s recent behavior and how it behaved right before the 1929 crash.
That at least is the conclusion reached by a frightening chart that has been making the rounds on Wall Street. The chart superimposes the market’s recent performance on top of a plot of its gyrations in 1928 and 1929.
The picture isn’t pretty. And it’s not as easy as you might think to wriggle out from underneath the bearish significance of this chart.
I should know, because I quoted a number of this chart’s skeptics in a column I wrote in early December. Yet the market over the last two months has continued to more or less closely follow the 1928-29 pattern outlined in that two-months-ago chart. If this correlation continues, the market faces a particularly rough period later this month and in early March. (See chart, courtesy of Tom McClellan of the McClellan Market Report; he in turn gives credit to Tom DeMark, a noted technical analyst who is the founder and CEO of DeMark Analytics.)
One of the biggest objections I heard two months ago was that the chart is a shameless exercise in after-the-fact retrofitting of the recent data to some past price pattern. But that objection has lost much of its force. The chart was first publicized in late November of last year, and the correlation since then certainly appears to be just as close as it was before.
To be sure, as McClellan acknowledged: “Every pattern analog I have ever studied breaks correlation eventually, and often at the point when I am most counting on it to continue working. So 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.”
Tom Demark added in interview that he first drew parallels with the 1928-1929 period well before last November. “Originally, I drew it for entertainment purposes only,” he said—but no longer: “Now it’s evolved into something more serious.”
Another objection I heard two months ago was that there are entirely different scales on the left and right axes of the chart. The scale on the right, corresponding to the Dow’s DJIA +1.22% movement in 1928 and 1929, extends from below 200 to more than 400—an increase of more than 100%. The left axis, in contrast, represents a percentage increase of less than 50%.
But there’s less to this objection than you might think. You can still have a high correlation coefficient between two data series even when their gyrations are of different magnitudes.
However, what is important, McClellan said, is that the time scales of the two data series need to be the same. And, he stresses, there has been no stretching of the time dimension to make them fit.
One of the market gurus responsible for widely publicizing this chart is hedge-fund manager Doug Kass, of Seabreeze Partners and CNBC fame. In an email earlier this week, Kass wrote of the parallels with 1928-29: “While investment history doesn’t necessarily repeat itself, it does rhyme.” And, based on a number of indicators rather than just this chart drawing the 1928-29 parallel, he believes that “the correction might have just started.”
DeMark is even more outspokenly bearish. If the S&P 500 SPX +1.11% decisively breaks the 1762 level, he told me, then a major bear market will have only just begun.
You may still be inclined to dismiss this. But there were many more were laughing last November when this scary chart began circulating. Not as many are laughing now.
That pattern does look interesting, however... If it comes true the Dow will only hit 12k minimum with 13.5k as likely support.
I doubt it will happen. Odds are only like one out of three of it happening looking at my numbers. Edit: Odds one in three of the scenario I just mentioned at the start of this post. Higher odds the Dow stabilizes around 14.5-15k in the next corrective wave due in around four weeks.
Mobster Al Capone once said of the 1929 stock-market crash: "I deny absolutely that I am responsible." Today, many strategists find themselves fighting off suggestions of a looming repeat of that long-ago market rout.
Rising to the surface again recently is the so-called "scary" 1929 crash chart that maps out market performance from mid-2012 to the present for the Dow industrials and compares it to 1928 and 1929.
The 1929 chart grabbed lots of attention in November. At the end of January, market timer Tom DeMark stirred the retro pot again by telling CNBC that stocks could "unravel quickly" in days and have reached an inflection point that resembles the period before 1929. Then Seabreeze Partners' Doug Kass (the man who has taken on Warren Buffett in another context) piped up in support.
MarketWatch's Mark Hulbert addressed the matter this week with this headline: "Scary 1929 chart gains traction." Readers haven't stopped coming for the chart and staying for the scare.
Hulbert dutifully analyzed the whole thesis. He took issue with the skeptics' argument that it's just a retrofitted chart and that the differences in scale between the two moves makes it a ridiculous comparison. (Critics say the chart takes prices from a historic boom and bust, and compares them to a much smaller boom.) His conclusion: Many were laughing last November but far fewer are laughing now.
And maybe Kass, DeMark and a few others are sticking to their guns, but some strategists are just doing the eye roll.
Downtown Josh Brown took the fascination with the 1929 comparisons to task a couple of days after DeMark let loose and retweeted his message after Hulbert's column appeared this week. "There's nothing constructive about suggesting that price patterns indicate the coming of the next Great Depression," concluded Brown in the blog post.
Here's one more look at the chart and a different way of slicing the material, courtesy of Bespoke Investment Group. The left is a copy of the one that's been going around. Note that the left Y axis, which represents the current rally, is at a vastly different scale than the right Y axis, which reflects the 1920s rally. Those divergent scales, say critics like Bespoke and Brown, give the perception that the market has been charting the same nose-bleed climb as it did in the 1920s. But if you normalize the two runs, graphing them as percent changes that both start at 0%, that similarity fades.
"The difference is the percentage advance in 1929, where it clearly went parabolic. The current rally from 2009, while mature, is much less extreme," wrote Brown.
More than laughter, there is downright annoyance among some analysts over this chart's rebirth. Here's what Raymond James's Jeffrey Saut said in his note on Thursday:
"I have been in this business for over 42 years, yet I do not ever recall getting as slammed with the same email as many times as I have about the attendant 1929 comparison chart. With the S&P 500 now off a mere 1.7% from its all-time high... investors seem exceptionally frightened by this 1929 'scary chart' comparison. Forget about the policy, structural, etc. mistakes that fundamentally caused the Great Depression, which are not present currently, the emotions stirred up by this chart have been amazing to me."
Saut harped on about scale and the apples-to-oranges comparison, and said he'd "seen this act before. The time period was the 1980s - 1990s when 'they' were trying to scale Japan's Nikkei Index to that of the D-J (Industrial).' All these kinds of chart shenanigans prove is that, 'Where you stand is a function of where you sit, or that you can make numbers do anything.' "
Alpari U.K.'s Craig Erlam said he's no chartist, but nothing he's seeing now justifies a selloff of the magnitude of 1929. Japan is still injecting plenty of cash into the market and an asset selloff, which played a big part in the rally last year, in response to tapering would be way overdone. A bigger correction than what's been seen so far? Sure, but other than that, he expects the correlation between these charts to break off pretty soon.
The view of technical analyst Andrew Thrasher is that maybe that stock prices could head lower if the same type of chart pattern that led to the 1929 crash developed now, but it won't be because we're mimicking what happened 85 years ago:
"In 1928, the Fed began to aggressively raise interest rates to combat, what was believed to be, overvalued stock prices. While you could argue that by the Fed tapering the QE stimulus it is in fact tightening monetary policy -- the Fed is still far from discussing raising benchmark rates."
Thrasher said he's got his eye on other potential dangers, such as any signs that margin debt is beginning to fall while stock prices are going up. He said that would be a signal that excessive bullishness is wearing thin and diverging from the equity uptrend, something seen when the market hit highs in both 2000 and 2007. Another concern is midterm election years -- this is one -- because they historically have produced bear-market bottoms in the second half of the year. And if the S&P 500 makes it back to 1,850 and divergences from breadth and momentum start to pop up, he will start to get nervous.
@sarge986's Stephen Guilfoyle said he considers the whole 1929 chart thing "entertaining," but is not buying any apples-to-apples comparisons. Another important point is that back in 1929, the DJIA was referred to as "The Market" and was the cornerstone of the investing universe:
"I don't think anyone considers that index to be as important in the modern era. Nowadays, when traders mention the market being up or down so many points in a day, they are referring to the S&P 500. The DJIA is really just an afterthought for most traders at this point," said Guilfoyle.
BTIG's Dan Greenhaus acknowledged in his note to clients late Thursday that he's once again being peppered by questions about the 1929 chart. The chart he discussed was an overlay of the 1928-29 chart and the S&P 500, but it's the same sort of thing:
"To repeat what we said in our 11.22.13 Bedtime with BTIG, this is a very lazy analysis. It's just too easy. Ignoring the fact that the scales are off, the fact remains that there is no statistical validity whatsoever to the chart. No predictive power, no insightful takeaways. None. It's a guessing game."
This isn't to say that people aren't talking about a correction out there, as our own Wallace Witkowski found that many stock-market skeptics have been talking about one for so long that maybe that doomsday scenario gives them something to talk about.
But as for 1929? To paraphrase the words of Capone, many strategists absolutely deny a connection.
I have been trading TF for a good while now and it works well for my trading style. I am curious what data sources you all use for ICE or more specifically TF. I currently just use IB's data however it is $85/month which I wouldn't mind if it wasn't filtered and was more accurate.
I have recently started trading 6B and 6E a lot more often and have noticed the data seems to be less reliable for those than TF. This is really what has me thinking I need a better source.
I am looking for options that doesn't break the bank and since TF is my bread and butter I want to make sure I focus on it first.
I use Ninjatrader platform and would use Kinetick but it doesn't look like they offer ICE which seems odd to me.
Kinetic used to offer Ice exchange but can't really say why they decided to let it go and was switched to Telvent DTN. Ice isn't cheap it is now $167.87 US per month, this is the cost for reliable data when you trade TF. I haven't checked with E-Signal but I think they are very close so because of that I haven't really bother looking around as I like their historical data and perpetual contract ##, that saves me lots of time when we have contract rollover.
You tell that to so many experience traders with years under their belt that told that to themselves months ago. So much pain out-there but do not think they are but once they do will be selling. Do not think the buying is quite over and who ever is buying after today needs there head checked. I already had one taxi driver asked me what to buy, need one more taxi driver to ask me one more time and its a sell sell sell.
All major U.S. stock indices closed lower for the week of March 10, basically giving back all of the previous week's gains. The market was led lower last week by the blue-chip Dow industrials, which lost 2.4%, leaving the Nasdaq and Russell 2000 as the only two major indices that are still in positive territory for 2014, up 1.7% and 1.5%, respectively, year to date.
U.S. stocks were particularly weak on Thursday, with the S&P 500 suffering its worst day since early February on rising tensions between Ukraine and Russia and concerns about a slowdown in China. Regarding the latter, I am expecting at least an additional 2.2% decline in China's Hang Seng Index to 21,000.
Dow Theory Non-Confirmation Persists
In last week's Market Outlook, I said, "The deeper that we go into 2014 without a confirming new high in the Dow, the more problematic it can eventually become from a Dow Theory standpoint."
As you can see in our first chart, the new 2014 closing high in the Dow transports set on March 7 of 7,592 versus the Jan. 23 high of 7,570 still has not been corroborated by a new high in the Dow industrials -- and last week both indices turned lower.
The longer this non-confirmation between these indices persists, the more likely that it will lead to a broad market correction.
Broader Market Testing Support
Also in last week's report, I pointed out that the S&P 500 was closing in on a quarterly overbought extreme that had previously coincided with or led most of the near-term broad market peaks in recent history. That overbought extreme helped to trigger a 2% decline last week, positioning it just above minor underlying support at 1,829 to 1,814, which is 3% to 4% off the 2014 highs.
The next chart shows that this support represents the S&P 500's 50-day moving average, a widely watched minor trend proxy, and Nov. 29 benchmark high.
If the S&P 500's 2013 advance is still healthy and intact, the 1,829 to 1,814 area should attract enough dip buyers to fuel a new advance to fresh 2014 highs. Conversely, a breakdown below this support would indicate that a correction is under way and would clear the way for a potential decline into major support 7% to 8% off the highs at 1,746 to 1,737, which represents the November and February lows and the 200-day moving average (major trend proxy).
One way to try to anticipate whether or not minor support at 1,829 to 1,814 will hold this week is by continuing to keep a close eye on investor fear via the CBOE Volatility Index (VIX). As I've been saying, a sustained rise above 14.6 could potentially trigger a market decline.
The "fear gauge" subsequently spent Thursday and Friday above 14.6, while the S&P 500 coincidentally collapsed by 27 points, or 1.5%. If VIX stays above 14.9 this week, look for the broader market to remain under near-term pressure.
but once they do will be selling. Do not think the buying is quite over and who ever is buying after today needs there head checked. I already had one taxi driver asked me what to buy, need one more taxi driver to ask me one more time and its a sell sell sell.