The Market is Looking Like 2008 All Over Again

After a crash as we saw in 2008, the punditry launched rationales for various crash analogies - 1929, 1987, Japan, etc. A veritable fleet of analogies was floated into the blogosphere. By themselves these comparisons are intellectually interesting and little more - it is not sound to extrapolate from a one-time sort of event. Market patterns reflect underlying psychology, so when a pattern is correlated to similar exogenous conditions, the odds of some level of predictability rise. This is why the 1937 comparison appeals to me, given the high-level similarities:

• crash in 2000, crash in 2009
• strong rebound off the bottom in 2003, rebound off 1932
• lots of stimulus and govt interventions in '04-08, similar in '33-'37
• recovery turns south in 2010, recovery faltered in 1938
• sovereign debt problems in Europe 2009, similar but not as severe as in 1931

This time around we avoided some crucial errors, especially the Fed intervention in 2008, which prevented the sort of freezing-up of the banking sector that we saw in 1931 after the Bank of the United States failed in Dec 1930; this may be a primary reason why the 1929 analogy failed to fit. There are also significant differences in the 1937 analogy, which is why it has been a bit remarkable that Summer 2010 is tracking closely to 1937 (with update posts here and here). 

In terms of timing, starting with 2000=1929, the tighter comparison would have been 2008=1937, not 2010=1937. Remarkably, the pattern we saw in the summer of 2008 seems also to match very closely as well to the market in the past few months. The exogenous events are also, oddly enough, lining up, especially the upcoming election: 

• back then we had a choice of a remarkable emergent force for change & historic figure (Obama) vs what looked like continuity with failing policies
• this time we have the a remarkable emergent force for change (the Tea Party) vs what has turned out to be less of change than a doubling-down of prior bailout/stimulus policies

The STU provided this 2008 chart on Friday, which I am reprinting with permission, and accompanied it with some interesting analysis:

 

In 2008 the peak of the summer rally happened on Aug11 with a subsequent bottom on Aug20 and a secondary top on Sep2. The "bifurcation" out of the August trading range didn't happen until Sep19, when we fell off a cliff. This time the summer peak has been Aug9, and the recent bottom on Aug25, both fairly close to the 2008 dates

You can see in the STU chart how they draw a 'plateau' around the period of Aug11-Sep19, showing the trading range. The bifurcation occurred on a second drop below the range; the first was a false break that was rapidly retraced into the range. 

The wave pattern has been an ABC flat, which has subdivided enough to have ended, or might have a small subdivision left. While the wave structure points to a drop Monday or at least early this week - and that remains the STU's primary wave count and prediction - the 2008 pattern suggests instead we meander upwards through the upcoming week (Sep3) and perhaps even a few weeks beyond. 

We just had a fifth Hindenburg Omen. A flurry of Omens does not increase the odds of crash after the second, but does strengthen the Fractal Finance case that market entropy (disorder) is increasing. (An Omen, if you recall, is when both new highs and new lows are high on the same day, plus other criteria). Entropy increases as a trading range extends, and leads to a sharper thrust out of the trading range. This means a sharp bifurcation is coming once the divergence in positions is worked out. That working-out shows up as a continued trading range. 

In the Fractal Finance view, we have been in a trading range (a "plateau") since May25 which has ranged from 1040 to 1130, with the momentary break of July 2 a False Break that was quickly corrected. The mid-point of the range is 1075. Plateaus are sideways moves like flats and triangles. and like triangles, often end near the mid-point. The recent drop off the Aug9 high also ran into a small plateau from 1074-1087. Thus a suitable end point of this whole trading range is 1074, the bottom of the recent plateau and the midpoint of the whole move. Neely as well often sees a retrace in a corrective move to the mid-point of a "box" built around the trading range. The 2008 experience, however, says the small degree plateaus are but a part of a large pattern, from Aug9 to sometime in Sep. While the 2008 pattern suggests we go higher than the mid-point, even retest the 1130 range at the top of the box, note that the bifurcation happened off the mid-point of the range (see chart and look at Sep19). 

We can now try our fourth test of Fractal Finance vs Wave Theory. So far Fractal Finance has succeeded in each test. 

• Wave Theory says the market will drop either Monday or early this week
• Fractal Finance says a trading range this week and likely longer, with at least getting back to 1075 range if not running back up towards the Aug9 high to retest the top of the larger plateau 

Comments

[Dsquare]

Hate the STU counts. If what's labeled as wave 3 is an impulse I'd eat my hat (if I had one).

[Sherman "Double Long"McCoy]

you do know, of course, that the "Hindenberg Omen" is meaningless because of all the bond etfs on the NYSE (we're in a bond bubble, and that this "Omen" is just a case of curve fitting in any event, right?

[Dsquare]

"This time around we avoided some crucial errors, especially the Fed intervention in 2008" The Fed is the banks and they (Bernanke and Paulson from Goldman Sucks) stole a whole bunch of money. The Fed is an evil institution and likely caused the Great Depression by design (Bonny and Clyde were the heros of the depression: "we rob banks"). Andrew Jackson had the right idea, kill the Fed. http://en.wikipedia.org/wiki/File:AJ~bank.JPG

[Hank Wernicki]

3 cheers for fractal finance !

[Account Deleted]

Dow Jones futures before opening bell

[OracleLurker]

we have yet to hit an oversold threshold that has been reached/exceeded prior to bottoming for 13 of the past 14 downtrends - although we are about 80% of the way there.

[da bear]

Who was the person who believed that the orthodox top came in 1928 and not 1929?
Was it R.N. Elliott himself?
If so, then the 1928 to 1929 event could have been drawn out from 2000 to 2007. Then the rest would match up, with the Fall of 2008 equaling October 1929.

da bear

[Les]

The 1920's housing market burst three years before the 1929 crash. Housing peaked in 2005, well after the technology bubble.

We didn't have the financial sector equity bubble until after 2002.

In the 1920's, the SEC cut margin for stocks to 10% from 20%. In 2006, Paulson cut margin from 50 to 15 percent.

[Howard]

Not true. Stock margin is still 50%. Hasn't changed in decades.

[Whitebear]

One thing is certain. When the market goes up one day, you will see comments about how the A/D line will have predicted this and how much money the guys will have earned with his coals, FCX stocks.

[Roger D.]

Has this grand supercycle finally topped? If MCD has topped and by my chart it is "finally finished",look for a fast decline back to the 54 area in the next 3 months.

Bernanke is F'ed along with the rest of us as Japan goes down the toilet first.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/ec3326f9-57ab-463a-a2c6-def5d4cd3f99

[JT]

Congratulations Roger!

You continue to have no idea what an UPTREND is.
What's it feel like having been short one of the strongest stocks on the board this last Summer???

[Hank Wernicki]

XAU TOP TICK , DOWN -0.70 % AS EXPECTED !

[Pat Riley Operator #136]

Haha!!!! Yelnick put in a little coded 1987 reference. 1987 instead of 1087 trading range high. Freudian slip or intentional? It doesn't matter as the 10(-)87 is a hint of what's to come anyway. By the way, Friday was 87 (1987?) trading days from the April 26 high and 66 tds from the May 25 low. It was also 67 calendar days from the June 18 summer solstice high. Friday also marked the latest intermediate level strength trading day cycle that also appeared after a similar 4 day box shaped trading range on May 3. (which I highlighted here in real time---I put this up on the red pill site last night)

[Roger D.]

JT,

I am not short MCD and have never been short that stock, stupid AH.