Minyanville Gives Us A Course In Historic Market Crashes
Posted By thestatedtruth.com on March 1, 2010
| A Crash Course in Historic Market CrashesÂ
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Ron Coby MAR 01, 2010 9:10 AM |
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Talking head after talking head appear on the TV daily telling everyone who will listen “the worst is behind†and excellent returns are still ahead for investors. These well-intentioned gurus and famous politicians are like shepherds leading a flock of gullible investors right to a financial slaughter house. From both a fundamental and technical perspective, it would appear that multiple market crashes are setting up all across the globe. I don’t hear anyone on TV mentioning that even as a remote possibility. Yet, an ominous chart pattern is now slowly developing in US equity markets similar to ones that preceded some of the most famous of market crashes. Let’s take a quick crash course on past market crashes so you can clearly see today’s market peak looks eerily similar to the ones in 1929, 1930, 1987, and 2007.
First, last week was a wild ride on Wall Street as volatility surged and then it retreated to where all the US markets essentially closed flat on Friday. Often times increased volatility like this is an indication of a trend change, or in this case, the sign of a top. Friday’s quiet market session felt like the calm before a coming market storm. On a recent Minyanville video, I talked about the powerful forces of deflation that are being strongly combated by the unlimited power of Ben Bernanke to print money and manage the prices of multiple (probably all) asset classes. Two weeks ago I did a video discussing how the Greek fiscal crisis looks to be building into a full-fledged European debt crisis, with many foreign markets building giant tops and possible “black cross†crashes. The biggest concern today is the rising prospect for a global fiscal debt crisis; a growing panic feeding into a crisis that could make its way to US shores the way the Asian crisis did in 1997 or the Russian crisis in 1998. As we all know, the US government is aggressively piling up enormous debts and deficits leading America down a very dangerous path of fiscal financial ruin. This could be coming sooner than anyone thinks, especially if the European contagion intensifies and spreads.
Here’s why we could soon set up for a market crash here in America when looking at the US economic fundamentals. The plunging consumer confidence numbers last week must be a concern even for the pompom-waiving bulls on TV because consumer spending accounts for 70% of the US economy. There’s the real possibility of a double-dip recession as Main Street continues struggling to stay solvent. Also, the Current Conditions Sub-Index fell to a 27-year low, which is further reason the markets could soon price in the risk of a further-weakening economy. Right now the market is pricing in the prospects of a coming Fed-induced liquidity-driven boom. Finally, the real estate market is still in very bad shape. Mortgage applications, new-homes sales, and existing-home sales are all weakening again. This is happening in spite of the fact that mortgage payments are at incredibly low levels. These are some serious signs that deflation is spreading in the real economy even as the Federal Reserve continues to spread monetary inflation into the paper economy (the stock market).
From the perspective of a market technician, there’s the very real possibility of a coming market crash. The Dow Jones Industrial Average now hovers just below the 55-day moving average so don’t be surprised to see the market move lower directly from here. It’s more likely the market will instead continue to oscillate above and below this critical moving average and then move into “compression†on our Lamson Grail Timing indicator. Once the market is fully compressed, look out below because a giant market plunge will soon be coming.
Stock trading is about probabilities and risk versus reward. At this moment in time, the risk is quite high for the market to get smashed while the potential reward on the long side is minimal. This technical setup now forming is eerily similar to many other periods of time that preceded a major drop in the stock market. Below are charts detailing the technical setup going into some of the biggest crashes in market history. These charts aren’t exact in terms of time between pivots, but simply very similar to the pattern forming today. The chart pattern starts with a sharp break under the 55 DMA after having a long and powerful uptrend. Next, a reflex rally back to or slightly above the 55 DMA takes place. Finally after moving into a fully compressed state, a breakdown to substantial new lows follows. However, if the market rallies from its present level, above the number-four pivot, then you’ll know that today will not be like these other crash market time frames. It’s above this pivot where buy stops on short positions must be placed.
Let’s take a look back to history and compare events to today. In 1929, the bulls roaring ’20s party came to a very abrupt ending. It seems that 2008 repeated that famous 1929 crash but in very slow motion. Today’s market top is reminiscent to the one in 1930. This is because the 1930 crash happened after a powerful 48% market rally that followed the famous 1929 crash. 2009 had a very similar multi-month rally and it, too, retraced about half of what it lost in the previous crash. Today, like 1930, the President of the United States says the worst is behind. Wall Street then, like now, rejoiced in confidence that “happy days are here again.” Today, almost every talking head on TV is singing the same bullish song. In early 1930, after the powerful stock market rally, the worst was straight ahead as the Great Depression spread in 1931 and 1932.
In summary, even as the bulls are paraded all over the TV, shades of 1929, 1930, 1987, and 2007 clearly exist. The following chart patterns all point to a market crash dead ahead, yet all we see are bulls cheering on the new bull market. However, here on the cutting edge Minyanville website, clear comparisons will be shown to why today’s market is on a crash course to repeat history.
Here are the charts:
1929
1930
Click to enlarge
1987
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