Scary 1929 market chart gains traction

This sort of scare tactic means nothing without an effort to explain the correlation. Without a testable theory, it&#x27;s meaningless data mining.<p>My guess is someone on the inside has already shorted the market just before press time, anticipating the effect the article will have among unsophisticated investors. And guess what, boys and girls? That kind of &quot;insider trading&quot; is legal -- you can say anything you want in the press, and you can position yourself to benefit from your own article in advance. It&#x27;s all perfectly legal.

I think that if this chart does have predictive power, the implications are far stronger and weirder than just &quot;the stock market is going to drop next month&quot;. If there is a match to these random ups and downs, then why? What does each of them signify?<p>Luckily, it has no such predictive power.

Yeah, patterns like this are much easier to find than you&#x27;d think and don&#x27;t have any predictive value.<p>Yes, the market could take a dive (or shoot upwards) any time, but not because of the pattern in this chart.

FYI, with charts like this it&#x27;s kind of important to do some quantitative work, not just take a look. Check out this taxonomy of charts:<p><a href="http://blogs.cfainstitute.org/investor/2013/05/15/an-r-squared-chart-taxonomy-seeing-is-not-believing/" rel="nofollow">http:&#x2F;&#x2F;blogs.cfainstitute.org&#x2F;investor&#x2F;2013&#x2F;05&#x2F;15&#x2F;an-r-squar...</a>

If you look hard enough in a large enough data-set you will eventually find a correlation. It is just like the experiment where a dead fish placed in an MRI machine was asked to identify the emotional state of a person in a picture. Guess what happened.<p><a href="http://blogs.discovermagazine.com/neuroskeptic/2009/09/16/fmri-gets-slap-in-the-face-with-a-dead-fish/#.UvpXTVJdWbV" rel="nofollow">http:&#x2F;&#x2F;blogs.discovermagazine.com&#x2F;neuroskeptic&#x2F;2009&#x2F;09&#x2F;16&#x2F;fm...</a>

I am not particularly a gold bug or even a fan of this site, but I have found this chart interesting for a long time:<p><a href="http://pricedingold.com/charts/DJIA-1900.pdf" rel="nofollow">http:&#x2F;&#x2F;pricedingold.com&#x2F;charts&#x2F;DJIA-1900.pdf</a><p>The pattern is fairly well established at this point. I am not sure exactly what it means and I&#x27;m not sure the obvious interpretations that most people would have are correct, but it definitely argues for some sort of pulsing macro business cycle.<p>My own hypothesis is that gold&#x27;s value vs. paper&#x2F;stocks is a decent indicator of &quot;fear&quot; -- people flock to commodities like gold, silver, and real estate, as well as to bonds, etc. when they don&#x27;t believe the market is sound. Thus gold&#x27;s value rises during these times relative to paper currency, which depresses the value of the stock market when priced in gold. During times of hope&#x2F;exuberance, the opposite occurs. People flee static investments for dynamic ones. Who wants to own a lump of metal when the markets are hot?<p>There hasn&#x27;t been a really big macroeconomic &quot;growth story&quot; since 1999, thus this graph.<p>If the pattern continues, this graph argues the same thing. Given that this is a repeating and established pattern, it&#x27;s a much stronger argument than the correlation in the original article up top. It argues that we have not yet &quot;hit bottom&quot; in the current macro cycle and that one more crash of some sort lies in the near future before the economy resets itself for the next growth cycle.<p>(Argues, but does not prove, of course.)

Someone told me that part of the reason for the great returns of the stock market in 2013 was because of the fed&#x27;s quantitative easing program. They said that the easing was increasing the money supply, and that money has no where else to go except into the stock market, because all other investments haven&#x27;t had great returns.<p>Is there any merit to that? I was planning to keep investing in stocks because of that. But, really I know nothing.

Bear Stearns failed mid-March 2008. Despite this, on March 27, 2008 Mark Hulbert gave serious weight to Richard Band&#x27;s prediction of an &quot;uptrend that could carry the blue chip indexes to all-time highs by late 2008 or early 2009. Dow 16,000 here we come!&quot; <a href="http://www.marketwatch.com/story/dow-heading-for-16000-richard-band-says" rel="nofollow">http:&#x2F;&#x2F;www.marketwatch.com&#x2F;story&#x2F;dow-heading-for-16000-richa...</a><p>And on April 18, 2008, Hulbert said &quot;The Dow Theory appears poised to go on a buy signal...&quot; <a href="http://www.marketwatch.com/story/dow-theory-poised-to-trigger-a-buy-signal" rel="nofollow">http:&#x2F;&#x2F;www.marketwatch.com&#x2F;story&#x2F;dow-theory-poised-to-trigge...</a><p>Following this advice, you would have bought near the top of the market, when what you really want to do is buy low and sell high...<p>Hulbert is probably the most knowledgeable student of DOW history. He knows that what happens to the DOW in the short run is mostly meaningless noise. He should take his own advice:<p>&quot;Some psychological researchers, for example, have presented series of random numbers to human subjects and then asked them whether there are any patterns in the data. Overwhelmingly, the subjects claim to have detected patterns in the data.<p>&quot;We should keep this research in mind as we watch the stock market day in and day out. We may think we have detected a pattern, but that doesn&#x27;t mean that it really exists.&quot;<p>Quoted from: Market Watch (April 3, 2007) <a href="http://www.marketwatch.com/story/dont-read-too-much-into-stock-markets-first-quarter-results" rel="nofollow">http:&#x2F;&#x2F;www.marketwatch.com&#x2F;story&#x2F;dont-read-too-much-into-sto...</a>

The y-axis tells the story. In 1928-29, the market lost about 45% of its value (375 down to 200). If the pattern holds, the current market will go from about 16400 to 12400, which is 25% of its value. That&#x27;s still bad, but not as bad as 1928-1929.

This is very similar to the shape of the google trends graph of &quot;fettucini&quot;.

Crestmont Research Stock Matrix: <a href="http://www.crestmontresearch.com/docs/Stock-Matrix-Taxpayer-Real1-11x17.pdf" rel="nofollow">http:&#x2F;&#x2F;www.crestmontresearch.com&#x2F;docs&#x2F;Stock-Matrix-Taxpayer-...</a><p>Key and other versions: <a href="http://www.crestmontresearch.com/stock-matrix-options/" rel="nofollow">http:&#x2F;&#x2F;www.crestmontresearch.com&#x2F;stock-matrix-options&#x2F;</a><p>113 years of stock market returns, adjusted for taxes, inflation, transaction costs, etc. Plus extra bonus history.

I&#x27;m pretty skeptical of charts like this. On the y axis, the scales aren&#x27;t relative. The gain on the black line before the drop is about 187% (200 - 375). The gain on the red line is 132% (12400 - 16400). On the x axis, there isn&#x27;t even a label for red so it impossible to tell how the different time periods compare.

Folks smarter than me: is it prudent to move my assets into cash for a couple of months? Is there really anything to this?

I&#x27;ve seen that same chart applied to crypto currencies lately, seeing this now just make me laugh.

The big question to my mind is how many other points there have been between then and now where this chart would have fit at least as well.

If you look hard enough, you will always find correlation between stuff.<p>Never forget that&#x27;s correlation doesn&#x27;t imply causality!

Self-fulfilling prophecy?