By Greg Diamond
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 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/early 1930s as well (the Smoot-Hawley Tariff Act).
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 is 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 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 (more than it prefers to), 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.
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 positions during the fall (October and November expirations) 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 – it 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.
And the 90-year cycle is another indicator suggesting that trouble is on the horizon.
Greg Diamond, CMT, is the current editor of Ten Stock Trader, a trading service based on technical analysis. Greg previously traded for a multibillion-dollar hedge fund and pension fund, managing money across all asset classes. He’s also spoken at business schools on trading and technical analysis… is a member of the Market Technicians Association… and holds the Chartered Market Technician (CMT) designation.