Friday’s Food For Fear
Do the two charts look the same to you? They should. They’re both the Dow Jones Industrial Average. The only difference is that the chart on the left is from the late 20s and the right chart is the current one at the high of 2007 (point A).
Both the charts found their historical highs (A) after the public found it easy to make money from the market from easy credit through borrowing at sub-prime rates. The housing situation in both eras were the same too with greed running rife through easy credit.
In the 20s, the ordinary person was allowed into the market when once it was an exclusive thing to be a trader. In the period between 1999 and 2007, anyone could become a trader because it became available to everyone through on-line trading.
In the 20s, financial institutions made it easy to get leverage on your trades – $1,000 could get you an investment leverage of $10,000. In some cases, deep pocketed individuals could get up to 100X their capital. Banks also made it easy to get loans so that you could invest in the stock market to make a quick buck and get rich quick.
In the last decade leading up to the 2007 drop, financial institutions were selling extremely highly leveraged products with the promise of a quick buck and easy-get-rich-quick schemes. On-line brokerages were (and some still are) allowing up to 200X leverage on their funds. Some even allow you to trade without any deposits by trading on contra or credit. All in the name of easy money and to get rich quick.
All this led to a bubble which blew up in everyone’s faces. The market took a nasty dip but promptly rebounded as institutions and the government took action to stop the drop. This rebound (B) gave everyone the impression that the market was done with its correction. The talk on the street in both eras was one of a “V” shaped recession.
But the underlying weakness was deeper than met the eye and it was obvious to the select few that this was going to be a short reprieve. More downside was obvious. But back then, as was the case last year when I said that the market was due for much more downside, the naysayers were derided and rubbished.
The market dropped further and made another “V” shaped bounce. At the low (C) in 1929, the market had lost 52% of its value while in 2008, the market lost 53%.
By the time the market clawed back a lot of those losses (D) the Dow in 1930 was only losing around 23% from (A). Today, the market has clawed back some of its losses and is only down 31% from (A).
Back in 1930, talk was rife about a recovery being on hand and people started rushing back into the market. The government and financial institutions had been busy stimulating the economy and bailing out ailing companies by pumping tons of money into the economy. Today, there is talk of a recovery and that the recession is “technically” over. The government is still printing more money than all of history can add up, still stimulating the economy and not allowing companies that are too big to fail, fail. Wall Street is still greedy and are hawking more nastily leveraged products like Credit Default Swaps and the new “Death Scam” derivatives.
Patterns are really a funny thing – they tend to repeat themselves in spite of a 90 year gap with three generations separating the players. Jesse Livermore was a genius!
So here we are … the market is rallying so much that a monkey could make money from it. I remember something Joseph Kennedy said back before the 1929 crash … it went along the lines of, “If the shoe-shine boy at the street corner is buying shares and making a killing, there is something very wrong with the market.”
Well, let me tell you … the retired Uncles around the coffee shops in Bedok North are making lots of money from the market right now … and they never went for any trading courses – I know this because these old fellas know who I am and can’t help taking a dig at me for teaching something that they can do so well without any education!
As the old saying goes … anyone can make money in an uptrending market. I am glad for everyone who made some in this brilliant 6 month rally. So congratulations to all the winners! Let’s hope this goes well into Q4 so that we can all make a killing together. Its about time we all made some.
I hope you all have a great weekend ahead. Stay safe and trade to trade well!
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Oh, I forgot … I didn’t quite finish my story yet …
So what happened to all that “recovery” talk back in 1930? Well, the market went on to lose more than 90% of its value over the next 30 months.
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Comments
Well done!!
A nice piece of presentation. Back last month, I did a fibbonaci retracement from the high of 2007 to the low of 2009. The COP is the low of 1987!! It’s so super scary that I immediately reject it that we going to erase 30 odd years of advancement without any power of stopping it. Looks like there’s a chance to be proven true after all. MOAB. (Mother Of All Bear)
A nice comparison 
Well, my opinion of VL shape still stays, it’s a matter of when the V will complete it’s formation! ;P
Shawn, you need to read the article more closely … your corresponding dips and rallies don’t match the percentages.
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Hi Conrad,
I went to look at my charts also. However in the last chart, actually C corresponds to Oct 2008 low and the lowest part to the right side corresponds to March 2009 low. After that, the charts of 1932 onwards shows a recovery just like how it’s going up now.. Pls correct me if I’m wrong..