The Financial Panic Necklace and the 1987 Historical Analogy

I have been following the many historical crash analogies that pop up. In my post The Japan 1989 Analogy I link to many other posts on these analogies in case you want to check this meme out. 1938 is the perennial favorite because it involved government stimulus that kept the economy on life support for a while, much as now; but 1987 keeps popping up. 

Here is a fascinating comparison of the Dow Transports overlaid on the Nasdaq in 1987 (see chart). I like this comment:

Keep in mind that the role of a bull market is to keep you out all the way up until the top, whereas the role of a bear market is to keep you in all the way down until the bottom. 

The other intriguing crash call is still alive: the Spiral Crash discussed in the post Another Crash Call: Is 2009 Like 1929 and 1987?  Chris Carolan of the book The Spiral Calendar had shown how similar 1929 and 1987 were when the dates were compared to the lunar calendar. Jim Ross, whose handle is VirginiaJim, had overlayed 2009 and found that we had hit the first of four key dates leading to the crashes in '29 and '87. If the high on Monday holds, we will have hit two key dates. 

The comparison points to:

• a downtrend into Nov13
• a final lower top on Nov23
• the crash starting around Dec10

The crash might not just drop as in 1987; it might have 2 -4 weeks of slip-sliding away. More a swan dive arc than a drop. Either way, bad joss for equities. 

I am not a fan of astrological patterns for investors. I note that in the book Passages the author found that at around age 28 Americans tend to shirk the career that thought they "should" be pursuing (based usually on parental biases) and turn to the careers that want to be pursuing. Saturn takes 28.5 years to transit the Zodiac, and so no surprise that the astrologers think Saturn influences that 28 year old. I simply think it is timing coincidence enshrined into pseudo science. 

Yet there may be something causal to lunar cycles. Chris Carolan has found a Financial Panic Necklace (see chart). Chris does NOT buy into VirginiaJim's 2009 crash; he thinks the next Necklace Panic is not until 2023. 2009 does not sit as a gem inside his Panic Necklace. His chart captures lunar cycles and solar cycles as well as eclipses, which would tie it to the Puetz Window. (Puetz found that eight major crashes from tulip bulbs to Tokyo all occurred after a solar eclipse that is followed by lunar eclipses.) 

In my prior post of astrological skepticism I discussed Puetz's analysis with VirginiaJim. A Puetz Window came this summer, and nothing happened, at least not over here. Despite my skepticism I note that the solar eclipse ran across China, and the Shanghai Index has been down ever since. Hmm. But not quite a crash of the sort Puetz had looked at. 

Puetz speculated that the eclipses and full moons do not cause the crashes but spook the market participants. Chris Carolan's neckline does include many but not all panics, just as many Puetz Windows come and go without market fireworks. Causality is obscure at best, and yet the multiple examples are intriguing of some psychological remnant buried in the reptilian brain (where fear and greed reside). 

Crashes are rare. Many are called and few happen. We already had one last year. So follow these calls at your own risk. Yet they remain entertaining to contemplate. 

Comments

[Michael]

Yelnick - I really think that the 1938-1942 market analogy that you have presented on several occasions and one that technician Louise Yamada has highlighted is the best parallel for today's market action.

In Yamada's market parallel, 1932-1937 is analogous to 2002-2007. Moreover, the 1937-1938 style 49% decline was eerily similar to the decline of 2007-2008. Only time will tell if we complete the 1938-1942 analogy.

Barron's recently noted this market parallel as well.

[Rob]

As a result of the rally from the March lows exceeding six months and the Dow Theory trend confirmation, Tim Wood maintains that the secular bear market we are currently in will not resemble either the 1929 - 1932 or 1938 - 1942 experience, but will more resemble the 1966 - 1974 secular bear market.

Perhaps it will ultimately resemble none of the above

[Free]

Crashes are rare. Many are called and few happen. We already had one last year. So follow these calls at your own risk.

-------------

Yelnick, good disclaimer. Much as I hope there will be a crash to burst the asset bubbles so the economy can have a real recovery, there just is not enough evidence for a crash yet. On the other hand, there are some positives:

1. Copper experienced an upside breakout and made new highs. And we know copper is known to be a leading indicator of the economy.

2. Emerging Markets recently broke out from a rising wedge formation.

So don't put much hope on the rising wedge also found on the DJI and S&P to lead to a crash.

3. U.S. Economy: Leading Index Climbs More Than Forecast
http://www.bloomberg.com/apps/news?pid=20601087&sid=aDXDtR1lrv48

ECRI Managing Director Lakshman Achuthan further says:

"WLI growth remains close to the previous week’s record high, suggesting that the U.S. economic recovery will continue to gain strength through the New Year"

We can be skeptical of the index and what Lakshman Achuthan is saying, but it is good also not to view everything with skeptism. Folks who have been skeptical of the rally from Mar really have nothing to gain.

4. BDI, another leading indicator, keeps rising, and rising.

http://www.bloomberg.com/apps/quote?ticker=bdiy&exch=IND&x=15&y=11

5. The bullish Dow theory trend change that occurred in association with the advance out of the March 2009 low still remains intact.

http://www.gold-eagle.com/editorials_08/wood102309.html

6. And more, if you would look at different aspects, than just hold a negative bias.

[Just a rookie]

Speaking of astrology? Sharma Mahendra said this back on 8/23, but I have found him very inaccurate as of late and he sure waffles a lot. I bet he is enjoying the money received from his subscribers, sitting on a warm beach throwing out 100's of predictions so he can claim to have some merit? LOL. I will Never ever pay for his newsletter again! FWIW

"If the stock market doesn’t fall within the next two to four months, then my prediction of markets hitting new highs will not come true. On the contrary, we may actually see a worse correction than was experienced in 1929, 1987, 2000 and 2008 two weeks before lunar eclipse of 31 December 2009 or four weeks before Jan 2010 Solar annular"

link
http://www.mahendraprophecy.com/LatestFlash.asp?Pyear=0&page=16#year

[chartman]

"If the stock market doesn’t fall within the next two to four months, then my prediction of markets hitting new highs will not come true. On the contrary, we may actually see a worse correction than was experienced in 1929, 1987, 2000 and 2008 two weeks before lunar eclipse of 31 December 2009 or four weeks before Jan 2010 Solar annular"

or in other words.. .." if it rains in May , June may not away....lol

What a load of sh**t !!

[yelnick]

Free, I do hope my skepticism of astrological investing came out. The crash analogies and spiral or puetz windows are intellectually entertaining, but great caution is advised. Nonetheless I welcome the commentators like VirginiaJim who forward these and believe it is useful to my readers to be advised of these comparisons. The plethora of crash analogies that have popped up in the last three months must mean something!

My primary surprise about them is we just had a crash last year, and I don't recall any past analogies where a crash was followed by another about a year later. Even Prechter's P3 is not expected to start as a crash, but more as what I call a swan dive - a sickening slide that gains momentum as it heads south. If we expect P3 to take as long or longer than his P1, it should last at least 18 months if not 1.6x or closer to 30 months - meaning a start now doesn't bottom until 2011 - 2012. The more likely crash like behavior would be in 3 of P3 anyway, not the start of it.

[Virginia Jim]

Dear Mr. Yelnick, what a great chart on DJTA/Nasdaq. At a PE of 144, the market is running on fumes.

To give you a little background, when I first posted the 1929-1987 analogy in September, I was hesitant because I knew it would be targeted as a Crash Call. Well, all my crash calls EXCEPT last August have been wrong. What I was trying to do was call attention to a possible (but very unlikely) replication of 1929 and 1987. And I wanted to do it in advance rather than in arrears in the unlikely (infinitely improbable) event it did replicate.

Well, July 11, the first of 4 dates was a perfect hit. AND October 16 was one day off. The closing high for DJIA was October 19. When DJIA hit 10117 and a new intraday high on October 21, it couldn't hold and did not close above the October 19 high. So, the second date is, tentatively, a success. [Tentatively because a new recovery high close can occur any day.]

So, it appears the probabilities have changed dramatically since September. Still unlikely that Chris Carolan's four dates will replicate via F25, but probably less UNlikely. Suffice it to say, I'm spooked.

The first wave of primary wave 3 will tell. In 1929 it was 17%, in 1987 it was 10%. I'm expecting it to be bigger than both because this, IMO, is the "Greater Great Depression" and intermediate 1 of primary 3 of cycle c should be greater. Further, as Carolan emailed me, he doesn't think crashes should occur in December (the 'crash' date is December 10) as supported by work by Puetz, Carolan and Elliades. That was one of my 2 original hesitations. So I think this first wave could be such a doozie, all will think the December intermediate 3 of primary 3 will be its continuance.

One last consideration. If ever there should be a tax selling season, this should be one.

Just some thoughts for this near last week of crash season,

Jim

[yelnick]

Jim, keep us posted as this develops