Investing with the Moon

Posts Tagged ‘Great Depression’

Is the breakout for real?

Posted by Danny on June 9, 2014

Stocks have pushed to new highs in rather convincing fashion. Is this a real breakout, or a just blow-off top?
Here is the current chart for the S&P 500 (click for larger image):

S&P 500

Our lunar red period has not stopped the recent rally and the S&P 500 chart is showing a clear breakout from the recent sideways pattern. This kind of breakouts is usually tested, so I think the market will drop back to 1920, where resistance should have turned into support, before possibly heading higher in the next lunar green period. Meanwhile my technical indicators have dissolved the bearish divergences that plagued the market since the start of the year, and there is now further room to rise based on the long term up trend channel. A drop below 1850 would tell us that this is a false breakout.
We cannot rule out a peak at this point, but on blogs and social networks I don’t see the kind euphoria that normally comes with major tops. Rather on the contrary, I see massive disbelief, cynicism and even anger about this stock market’s continued climb. Everybody seems to be trying to go short at the top. Comparisons with 1929 or 1987 have been getting extensive coverage in financial news media, implying that we are about to crash. Few and far between are the calls for a continued bull market.

It is one of the great benefits of writing a financial blog or newsletter that the responses (or absence of them) often provides good clues where the market is actually going. For the last couple of years, whenever my analysis or chart points to an impending decline in stocks, it gets comments and likes on twitter. But whenever I post a bullish scenario it just harvests silence. And for gold it has been just the reverse. So, I have gradually learned to doubt my forecast if too many readers agree with it. The scenario that nobody believes is not rarely the one that pans out.

For example, almost nobody is considering the possibility that we are in a repeat of the 1920s, a scenario I have been watching since last year. Since our latest update the odds for this scenario have continued to go up. Here is the updated chart (click for larger image):

Dow vs 1920s

The correlation between “Dow Aug 1921 – Nov 1926” and “Dow Feb 2009 – May 2014” has now climbed to a whopping 90.4%, up from 81% when I first posted this chart. The case has become even more compelling with the news that Q1 US GDP was negative. A mild recession in 1927 also forced the Fed to delay their unwinding of ultra-low rates. When they finally started raising rates in 1928 it caused the stock market to double within 18 months, and then a collapse into the great depression. The Fed is quietly setting us up for a similar disaster, simply repeating their mistakes from the 1920s.
One of the conditions to keep this scenario on the table was that the Dow needs to break out above 17000 this year. We are now very close to that point. I still think the market will deviate from the 1920s at some point. But the question is: when? Keeping up with the roaring twenties would give us Dow 20000 by early 2015, with the market spinning out of control after that. If so, I would expect to start getting comments and likes for bullish posts, while harvesting silence for bearish scenarios. That’s how we will eventually know when we are close to the top.

Good luck,



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What parabolic peak?

Posted by Danny on June 2, 2013

The recent advances in the stock market have led to an explosion in articles contending that we are in a new stock market bubble or mania. Some analysts are seeing a parabolic peak already. Almost everyone seems to agree that some market decline should come any day now. The number of references to “bubble” on Twitter has also gone up significantly, as was pointed out in this article.
So, let’s have a look.

We all know how a parabolic peak, typical for speculative manias, looks like. The chart just shows a faster and faster appreciation, until it goes almost vertical.
The stock market in the 1980s and 90s shows a classic example (click for larger image):

S&P monthly

It’s easy to see how the rate of change accelerated twice, until it became unsustainable, and then the inevitable collapse after the year 2000.

Is that the kind of picture we see in the current S&P 500 chart? Here it is (click for larger image):

S$P 500 weekly

This is not a parabolic peak at all. If anything the rate of change has decelerated noticeably since 2011. In fact the S&P is still near the bottom of the trend channel it has occupied since 2009. That doesn’t mean it has to keep rising within this channel forever, but unless we get a drop below the support line (currently ~1500) it can keep going for quite a while. If it does so, then I would look for the market to reach the mid line by summer, which would be around 1800. The mid line is likely to put up serious resistance, so look for a meaningful correction if the S&P gets there.

Is there any precedent for this kind of scenario? Well yes, it’s the one scenario you never see mentioned anywhere in comparison with the current times: the roaring 1920s.
Some will consider that crazy, but there are more than a few parallels with now:
1) The market bottomed out in 1921, at the end of a sharp deflationary depression, not unlike 2009
2) Investors had suffered 50% losses twice within a decade, just like investors have burned their fingers twice in the 2000 – 2010 period. When investors have recent memory of painful losses they become very skeptical of any new market advance, and this sets the stage for a long bull market.
3) By 1923, two years after the bottom, the Dow Jones had recovered most of the depression losses, and by 1925, four years after the bottom, it was pushing into new highs. The current market playbook happens to be very similar, markets have pushed into new highs four years after the bottom.
4) What fueled the market? Well, besides ongoing innovation, the Fed also increased the money supply by 60% in the mid 1920s, with the aim of keeping interest rates low, not unlike the current QE programs. That money had to go somewhere, and apparently started flowing into stocks at some point.
5) We know what happened next. Most investors had probably remained scared, scarred and skeptical, even when the market was setting new highs every day. Then they started buying stocks in 1928 and 1929, and that made for the parabolic peak, almost eight years after the bottom. A similar scenario now would point to a peak in 2016/2017.

Here is the chart Dow Jones 1920-1940. (click for larger image):

Dow Jones 1920-1940

I have added the current years to line up the historic comparison. Notice how once the market moved into new record highs, there was only a brief correction and then the market kept grinding higher for almost a year without any serious pullback. Is the same happening again now? We will know by the end of the year.

Here is a chart comparing the current recovery with the post-1921 depression recovery, based on monthly Dow Jones index (click for larger image):

Dow Jones 2010vs1920

Up to now there has been a 0.81 correlation between them. We will see how it continues.

I think the current high levels of ongoing skepticism, and all the talk about bubbles, are actually lending credibility to this scenario. And the ongoing QE programs around the world are known to come with a high risk of igniting another stock bubble.
Bear in mind: history does not repeat, but it tends to rhyme.
The market action in the early 1920s rhymes well with what we see currently. The question becomes: when and where will the rhyming stop? Are we setting up for a great depression in the 2020s, or will the rhyming stop well before then?


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Posted in Market Commentary | Tagged: , , , , | 5 Comments »

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