Opinion: If market follows the same script, trouble lies directly ahead
Reposted from: MarketWatch | by Mark Hulbert
CHAPEL HILL, N.C. (MarketWatch) — 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.)
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 -0.19% 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.”
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.
About the Author
Mark Hulbert is the founder of Hulbert Financial Digest in Chapel Hill, N.C. He has been tracking the advice of more than 160 financial newsletters since 1980. Follow him on Twitter @MktwHulbert.
Related Post: Evidence: Stock Market Crash is Coming