Saturday, February 15, 2014

The 1929 Chart: The Bulls & Bears Are Both Wrong

The following chart has been moving around the financial sphere the last few weeks. It has been used to argue that stocks will soon experience a 1929 like decline based on the similarities of the current price action.


I try to spend 50% of my time reading and listening to bullish articles, newsletters, books, radio shows and television segments. The other 50% I try to focus on the bearish argument.

I try to follow the same process for the inflation/deflation debate and other topics in the financial world. This sounds easy but it is not. Einstein said that one of the most difficult things you can do is hold two competing thoughts in your mind simultaneously. Your mind is a rationalization machine looking for one answer so it can move on, and after listening to an intense inflation/deflation debate it feels like there is a prize fight taking place in your head. It is exhausting.

This is why the absolute best authors and money managers have the ability to change course when new information comes into play. A great example of this is the peak oil debate in the United States. When the fracking process was first introduced, the best money managers in the energy field studied it relentlessly and changed course for their funds. The ones that did not have under performed.

What does this all have to do with the chart above?

It is a minor example of this psychological phenomenon. The "bearish" camp has used this chart to show why stocks will soon crash based on technical similarities with 1929 and today. The "bullish" camp has taken the time to completely discredit these thoughts and then discuss why stocks are heading much higher. While going through both arguments is beyond the scope of this discussion, you can read a bearish discussion here and a bullish discussion here.

Where do I stand?

Somewhere in between, which is where I try to always keep myself. I feel that U.S. stocks should fall significantly from here based on the fact that they are extremely expensive, sentiment is at record highs and analysts have an incorrect forecast on where the economy and earnings will move in the next 18 months.

However, if the market should crash in line with the chart above (based on the fundamental reasons just discussed), it will be coincidence; not causation.

For more see: 2014 Outlook: U.S. Stock Market

2 comments:

  1. It's not just 1929 though. Take a look at the tops of the 1989-1990 Nikkei and the 1987 DOW as shown here http://solarcycles.files.wordpress.com/2014/02/12fe10.png.

    I think it could be indicative of a typical blow-off topping pattern in which investor psychology creates similar price movements. What do you think?

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    1. I follow long term secular cycles (years and decades), but focus less time on short term technical analysis (hours, days or months). This is not saying one or the other is right, only what I personally follow. I have just seen too many short term "sure thing" patterns (see "Hindenburg Omen") break down over and over again over the past decade. Every top is different because the world is a different place than it was in 1929 and 1987. That said, I am very bearish on the future direction of U.S. stocks.

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