That 1937 Analogy Fits the Bigger Picture

Doug Short does a nice set of analyses and charts, and does a take on how well the current market is tracking 1929-1945. His key chart shows the constant-dollar S&P, overlaying 2000-present (blue) on 1929-1945 (red). It is striking how closely the key turn dates seem to line up, especiaslly with the drop in the past few days matching the red drop on this chart:

 

We avoided the big drop that they got in 1932, and have now settled into a pattern that would suggest a further drop ahead, and even a lower low than last march 2009, but not the deep collapse touted by the über-bearish commentators. His chart even suggests timing for the low: Fall 2012. 

The charts look different in nominal terms, but over longer periods the inflation-adjusted constant-dollar index is a better comparison. There are several deflators to use; Doug chose the CPI, which has issues due to changes made to 'save' social security in the 1980s. Using the CPI prior to those changes would have shown a deeper drop in 2007-9. It is striking that even with the unadjusted CPI, we fell deeper in 2009 in percent terms that at the comparable time in 1938.

A lot of these comparisons are done with the Dow, but the S&P is a broader index which should paint a more accurate comparison. It also gives a different and more troubling picture. It is well known that the peak in 1929 was not breached again in the Dow until the 1950s, and in the inflation-adjusted Dow, not until the 1960s. The constant-dollar S&P skimmed slightly higher than 1929 in the '60s, but did not get back above permanently until 1985:

Comments

[e_djur]

I would like to suggest to make comparison, something like fractals. Take Cycle Lines tool, set start date 08 October 1974 and spacing 1014. It will give some 4 years cycle periods. Watch troughs of the period 1966 through 1974. Then compare it with the time period of 1998 trough through the present. It seems that we can expect next lower low than that of 2009 Mar.
rgds.

[OracleLurker]

Yelnick - good to see you're back on track with putting us in 1939. Also you've been spot on with your past 3 market calls i believe - nice work. I've thought that perhaps the reason the initial drop this time around wasn't the deepest, unlike the '30s and 1840's K-winter - has to do with the fed? Maybe the science of policy making has evolved to a point perhaps where destabilizing economic collapse can be avoided, although probably at the cost of extending winter. Or if Prechter is correct and the experiment fails then they have only succeeded in postponing the deepest drop.

[Rick]

I believe that the wave count and trailing PE ratios put the April 2010 primary wave 2 top in C closer to what I believe was the same point in February 1931. Much more downside to go.

I have been looking at the wave forms rather than durations for the 1929 - 1932 period.

Thinking about why the frequency of the waves from 2000 to 2010 are so much longer I believe the difference is the faith in the Fed and to a lesser extent the Federal Government that has had nearly 100 years to establish a false sense of security to markets. But the markets learn and I see that the wave frequency has been increasing closer to the 1930's as markets begin to see the false hope in the Fed.

I also looked at inflation adjusted stock prices and trailing PE's waves for the periods between 1901 - 1920 and 1966 - 1982. Applying the corrections in trailing PE's for all three of these earlier secular bear market periods and wave counts would suggest a bear market low on the S&P of between 130 - 160 in constant 2010 dollars. The time frame will depend on the learning curve of the markets. My guess is 3 to 10 more years? Probably the lesser.

Of interest is the low of S&P 130 - 160 would generate trailing PE's low enough to cancel out the all time record trailing PE's of 1999 - 2000. I like the symmetry.

[Mamma Boom Boom]

I don't like comparing this time to any time in history. This is all new, the markets have never experienced anything like this.

My indicators reflect this new reality.

[Hank Wernicki]

look at the 1987 fractal on the Dow, a much better fit ...............

daily vs week between then and now 2010

Hank

[JT]

Looking at the Elliott Wave "Blogosphere" over the weekend, I see that the over-riding opinion is one of complete and utter BEARISHNESS with the typical EW "pundit" talking of IMPULSIVE downward wave action in the Dow and S&P since the Wave 2 peak of August 10th, and a head and shoulders pattern that is about to give way to a "third of a third" once this current bounce is over with.

Good Luck with that Count.
:)

[Chabazite]

So, Hank - having looked at the two, I guess you're really optimistic about the future ;) Great insight, and thanks. Chab.

[Bird]

Mamma, I am happy to admire you for your 'indicators'. But only if you are right.

[Sherman "Double Long" McCoy]

This guy has plugged in an answer and is contorting prices to solve for the conclusion. The 1907 panic is a much better analog. It was a banking crisis that saw a 50% collapse in prices that was ultimately resolved to the upside. I'm not saying you guys are dumb, but you have a huge directional bias. You've got to allow for the possibility you're wrong, and you totally fail in that regard.

The bottom looks more like 950, followed by a resumption of the rally into year end. Where you get killed is in the REAL price decline. Check out the SPX denominated in CHF - it's illuminating.

[OracleLurker]

intermediate term indicators should always take precedence over this kind of forecasting but right now mine are pointing down.

[Les]

Watch the RUT as it is leading. Second test of downtrending channel from April occurred on Friday. When it breaks the trendline, it'll also coincide with the break of the rounded top (H&S to some people) and should result in fast decline to bottom of this channel. For the S&P 500, this channel currently extends from 940 to 1040.

[JohnEBGoode]

Listen to Momma guys, her indicators are pointed up naturally.

[DG]

I don't see anything yet that says we're going to break out of the trading range in effect since May. Of course, one can attempt to look ahead and say we will break out either to the upside or the downside, but as far as actual chart-based evidence either way, I don't see any.

[yelnick]

Oracle, the mistake made in Dec10 1930 was to let the Bank of the United States fail, which led to a banking panic that started in the Bronx and spread across its branches across NYC. It was a Jewish bank, not THE bank of the United States, but confusion reigned. It was supposed to be rolled up into three other banks, but the deal fell through on Dec8, leading one person to ask to cash in his stock on Dec9. He was rebuffed, left disgruntled, and soon a crowd formed to get their money out. It may be this unknown person spread a false rumor. In any event, a run on the banks started from that moment. The next day, the bank shut down, even though it had successfully paid the depositors the day before. Milton Friedman documents this as The Big Mistake and says the Fed should have acted, although the NY state banking authorities did act and quickly. But to no avail. It may be the confusion about this bank and the Fed spread faster than it should have, and banks began dropping like flies. At that point we had a recession and not a depression, but that moment sparked a huge contraction of credit that drove us down to the first depths.

This time around the Fed acted to prevent a meltdown, and the first drop was not as severe.

Credit goes to the central bank, not the stimulus.

Implication is if we avoid the banking crisis we can avoid the deep drop.

[Michael]

DG,

I take it that you do not see anything IMPULSIVE in the decline from the August 9/10 high?

Just wanting to confirm.
TIA.

[DG]

I take it that you do not see anything IMPULSIVE in the decline from the August 9/10 high?

I do find it unlikely. However, if one looks at the intraday charts for the SPY, there's a small possibility that the decline began with a 5 wave 1st Extension Impulse (wave 1 112.97 to 109.92, wave 3 from 109.71 to 107.6, wave 5 from 108.66 to 107.18). The main problem with that is that the "extended" wave in that scenario is not at least 1.618X the next-longest wave, which is a violation of the Rule of Extension.

Another place with a possible 5-wave decline is from 110.38 to 107.43 (wave 1 110.38 to 109.79, wave 3 from 110.05 to 107.92 and wave 5 from 108.25 to 107.43).

Short-term, those are really the only two places I see anything that could be an Impulse wave and I doubt they will turn out to be Impulses in the broader sense of a P3 down (when I say "doubt", I mean there's no way in the world that will happen, actually). They could turn out to be parts of a Zigzag, with the second 5-wave move I outlined above being wave-1 of the C wave of an Elongated Zigzag to form wave-A of a Triangle, because that second 5-waver (if it is one) is definitely at a lower Degree than the first. A minimum target for that structure would be around 101 SPY, but could extend all the way down to ~95 SPY. That's about as bearish a view as I can see in what's transpired so far from the August high.

[Hockthefarm]

The bears are sure out in force this weekend. Dent remains as bearish as I've ever seen him. Figures we may rally to 10,500 before a swift drop into the 8000's. His calls have been right on lately imo.

OTOH I spend some time this weekend with a long time friend who is a small money manager in his mid 60's. He sees no big drop coming other that the normal 10 percent one might expect for the period. His colleagues say much the same. He has convinced me that if we do break out to the upside, it should be bought.

Note to Michael: You keep trotting out the fact that markets are forward looking as if it is a piece of rare knowledge rather than information. Most here know this. It's your churlish, sociopathic (dare I say reptilian) writing style that is most revealing. I'll be uber bullish when you are walking down the street cock in hand, with mismatched shoes on looking for someone to blame.

Hock

[Hockthefarm]

Food for thought:

http://www.nytimes.com/2010/08/22/business/22gret.html?_r=2&ref=business

Hock

[Mr. Panic]

369 trading days from the 3-6-9 low is tomorrow August 23. Let the fireworks begin!!!!
Oil and the euro were hammered on Friday but due to options expiration manipulation, the stock averages held up better than expected. Bulls better hope the currencies and commodities reverse higher tomorrow.

[Les]

There's been a 10 percent drop in the Russell and the broader market in the last two to three weeks. The large caps and foreign stocks have been spared so far. That's usually not the pattern of capitulation in a decline.

[da bear]

If this stock market is comparable to 1930 then a low would be in by the summer of 2012. So it looks like 2012 will be a great time to buy!

Another thing to consider is that Martin Armstrong pointed out that the British economy (and perhaps stock market?) bottomed out in December 1931. Maybe we are the new Great Britain and China is the new us. Who knows...

da bear