October 16, 2019
We’re finishing up our October issue of American Consequences, which will be in your inbox on Saturday morning.
And this story from technical analyst Greg Diamond is one of my favorites. It’s short and takes a compelling look at the market 90 years ago, in 1929 – an auspicious timeframe considering that some investors focus closely on 30-, 60-, and 90-year market cycles.
I think you’ll find it illuminating…
1929: Sounds Like Yesterday, Seems Like Tomorrow
By Greg Diamond, CMT
90 years ago, it was fall of 1929…
Men wore tailored suits and fedora hats, and ladies donned bob haircuts and flapper dresses. Ford’s Model T cars lined suburban streets. Children worked on their homemade Halloween costumes, their parents unaware of the infamous tragedy about to hit the economy…
The Wall Street Crash of 1929 was the worst stock market decline in U.S. history. The Dow Jones Industrial Average lost $30 billion in market value in just four days.
Here is a chart of the legendary stock market crash that year…
I want to highlight the timing in 1929. The market rallied into May, with a big correction that month and then a bottom in June. Then the market topped in August… You can see what happened afterwards.
The stock market this year is tracing out to the same identical pattern in price and time as 90 years ago…
The May high led to a big correction with a bottom in June and then a top in August. The first two weeks of August are historically a turning point to watch in the market. On average, the stock market performs the poorest during September, with the three leading indexes achieving their worst numbers during this month.
W.D. Gann, a well-known technical finance trader, discovered this crucial 90-year pattern. History doesn’t always repeat, but it definitely rhymes… And this cycle should not be ignored. Aside from the nearly identical price and time patterns from 1929 and now, there was also a trade war during the late 1920s and early 1930s as well (the Smoot-Hawley Tariff Act was enacted in 1930).
The similarities between 1929 and 2019 are incredible in many ways. The key to understanding why these cycles are important is that Gann observed parallels between what is happening then and now, the dates at major market turns, along with global events, trade wars, etc.
Looking at the two charts, it’s hard to dismiss the similarities. The trade war between the U.S. and China is now escalating, with additional tariffs set to be implemented by the U.S., and China is now threatening to retaliate as well.
Let me be clear – I’m NOT looking for a crash and I’m NOT expecting a depression or a repeat of what happened with the crash of 1929. This isn’t some doom-and-gloom, end-of-the-world claim…
The point here is that the market’s advance this year based on the 90-year cycle is nearly identical to the 1929 advance in both time and price… and what lies ahead is troubling. This simply provides me with more evidence that rallies should be sold, and it supports the “round trip” market outlook.
I have no doubt that the Federal Reserve will be forced to cut rates again, which will limit the downside within equity markets, but not before at least a 10% decline – or perhaps even more… This is all part of my round-trip market prediction. But it’s a few weeks before the Fed meets again, and with earnings data complete and the trade war intensifying, there aren’t many catalysts to support the market before then.
Calling exact market tops is difficult, but the evidence continues to pile up that the next month or two will be an uncomfortable ride for equity investors – whether the rally continues a bit more or not.
I’ve been scaling into equity put-option positions during the fall (with October and November expiration dates) for this very reason and will continue to do so on strength, looking at December expirations and even beyond.
In all my years studying and trading the markets, it is always the U.S. equity markets that are the last to “get the picture.” There are valid reasons for this – the U.S. is the strongest economy and has the best companies. But it is also the incessant focus on earnings, which are lagging indicators, that can lead the equity markets a bit higher when so many other signals are sending a warning.
This looks to be the case yet again, now that earnings reports are complete, and the divergences are still intact.
The 90-year cycle is another indicator suggesting that trouble is on the horizon.
Now here are some of the stories we’re reading…
With many Democratic candidates still in the race, the number and range of policy proposals is vast… [UBS strategist Keith Parker] laid out a few major issues to watch for the 2020 election and their potential impact on the market.
The question of whether Turkey, a member of the North Atlantic Treaty Organization, is really a U.S. ally was put to U.S. Defense Secretary Mark Esper on Fox television this morning. “No, I think Turkey, the arc of their behavior over the past several years has been terrible,” he said.
Perhaps ABC was searching for footage – dramatic, explosive footage – that confirmed that narrative. Or maybe it was a clumsy mistake. Whatever it was, it shows how few journalists understand the particulars of guns.
When people introduce Dave Barry, they always say he won a Pulitzer Prize. Which is impressive, of course. But it doesn’t really seem like the most salient fact about him.
Meanwhile, here in Baltimore…
Most of the shootings took place Saturday, with 15 people shot, including a two-year-old toddler in what police said was a road-rage incident.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
October 16, 2019
P.S. After Monday’s essay, Pete K. wrote in to remind us of Will Rogers’ quote: “Be thankful we’re not getting all the government we’re paying for.”
We are thankful Pete, we absolutely are.