Urban Survival

U The Method Used:
Wondering why it's 1929? Well, here's a not-to-technical explanation:

Several regular readers of this page have asked me to go into a bit of detail about how I came up with the
observations about the market peaking and nearly a long term decline. Here goes:

My vastly simplified approach is to simply look at the curve represented by the market run from
1920-1933 and consider how closely it parallels the market today which has run from 1987 to present.

Interestingly, the market wasn't doing very well prior to the end of World War One. In fact, on 12/21/17,
the market was at 67.08. What makes this event so interesting is that in each case, the market bottomed
out just prior to the end of a major war.

You will see the phenomena again in the recently ended cold war. The market bottomed out in 1987, prior
to the end of the cold war.

The market of the WWI era then recovered a bit, until 12/31/20 when it stood at 68.01 - less than 2%
higher than its 1917 low. This took 158 weeks.

As we look at recent events, we should see - if we are tracking in a similar way to this period, a recovery
from 1987 and a retest of the 1987 low about 3 years later.

In fact what we saw was a market low the week ending December 11, 1987 of 1774.87. From here, the
market recovered through the week ending November 2, 1990. The market closed that week at 2437.13.
This was 151 weeks.

You could say to yourself, "Aha! The problem with this analysis is that the market was up something less
than 2% from 1917 to 1920, but up 37% from 1987 to 1990." And you would be correct.

Except of course, for inflation. During the period under consideration, correcting for the rate of inflation
alone would have moved the Dow from 1774 to 2377! When you look at it this way, correcting for the
declining purchasing power of the dollar wrought by inflation, the Dow went from an equivalent of 2377
to 2437, a gain of...2 1/2%.

That's close enough for me!

Now let's apply this to our present situation and trying to come up with the rate of market increase.

To benchmark where the market is going we can assume that if the market started up from it's 1917 low
of 67.08 and the 1987 low of 1774.87, then the multiplier for this market ought to be in the area of
1774/67 = 26.47. The next step was to apply this multiplier to the 1920's data and see what the curve
looks like.

Unfortunately, you quickly see that if you line up the peak in 1917 with the peak of 1987, the curves are
nearly identical in structure, but not lined up correctly in time.
What you need to do is move the baseline for the
present period to a later period in the 1920 region. So what approach works? My experimental approach is
lining up both ends and the middle so that the curves touch, and keep the high level of coincidence in the
present in order to minimize time distortion. If you take this approach, you can then see what led me to
my call of a market peak the week ending April 24th.

The academically interesting thing about this chart approach is that is is not particularly math intensive.
You simply ball park the multiplier, in this case around 26, and then slide the time lines until you are
happy with the coincidences. The precision of the time alignment is not critical, unless you are trying to do
some daily trading. In which case, noise in the trading area can get you even if you are right about the
direction of the market.

Viewed in this way, important conclusions may be drawn:

First: 1987 does correspond to the market low of 1917.

Second: the shape of the run up in the market in both the 1920's and the present describe exponential
curves.

Third: Although painful to a lot of traders, 1937 wasn't an especially significant event when viewed in the
longer term.

Fourth: (Most important of all) It appears that the major run up in the stock market was largely the result
of how federal monetary and spending policies were adjusted in the period nearing the end of both WWI
and the end of the Cold War. The free spending period of the Reagan and Bush presidencies have allowed
a "clean acceleration of the exponential curve", where in the 1920's, there was some indecision in
monetary matters that caused what amounts to a "delayed take off".

I expect that if I had time, I could demonstrate how the change of fiscal policies in both cases set the stage
for the market growth and eventual blow off top that is now upon us.

Supporting Inflation Data Source:

Inflation Calculations: from http://www.stls.frb.org/fred/data/irates/mprime Back to main page