Saturday, February 15, 2014

That 1929 Stock Market Parallel Chart

By now, most people have seen the chart by market analyst Tom DeMark:
You can probably guess that the people whose livelihood depends on churning the markets have all dismissed this as silly speculation, "Woooo..  a line resembles another line ... woooo" - that sort of reaction.  A few minutes of search finds article dismissing it in MarketWatch ... Wall Street Journal ... Business Insider ... CNN Money ... need I go on?  They point out, for example, that the scales of the two curves are so disparate that it's only the number crunching that makes them look similar.  Obviously, their self-interest would tend to make them think this way.  The question remains of whether it's a valid comparison. 

My all-time favorite quote about prediction is from physicist Neils Bohr, who said, "Prediction is very difficult, especially about the future."  Yet every trading firm in country (world?) has someone on staff who studies charts of the market just for this sort of pattern - maybe several people.  It's also possible that Technical Analysis works (to the extent that it does) simply because of the fact that all the major brokerage houses have technical analysts and they all see the same signs.  Self-fulfilling prophecy. 

Another favorite quote of mine that applies to this sort of analysis is, "If you torture numbers long enough they'll confess to anything".

But I'm not answering the question.  Is it valid?  Is it real?  By this chart, the market crashes by the end of March.   Of course, I can't answer the question because I can't see the future either.  The fact that everyone knows about this chart hinders its ability to predict.  If everyone changes their position to protect themselves from a bad collapse, or to take advantage of some opportunity (if it showed that) that mass behavior shift changes the shape of the curve.  Is it reasonable to suggest the market is really overvalued now?  Sure, but it has been overvalued for some time.  Is it reasonable to say there will be a correction?  You bet.  The questions are when? and how big? 

Tom DeMark, whose chart started this whole thing, gave an interesting interview on Glenn Beck's radio program.  Tom is a guy who says he's been doing this sort of work for 45 years, and claims to have been called too Pollyanna-ish for being too optimistic in his forecasts - up to a five or six years ago.
“We try the measure supply and demand because that’s what drives prices. There’s a major component, which is sentiment, and extremes are met at highs and lows. There’s extreme optimism or pessimism. So we try to measure those and incorporate them into fundamentals,” Tom said. “But what’s happened in the last five years has been really troubling. What had worked in the past and seems to work globally – it works very well in the Far East, Middle East and our analysis there – but the domestic market here in the States is troubling.”

“It seems like there’s an influence that seems to incite fear every time we approach what appears to be a top in the market,” he continued. “At bottoms, it works very well, but at top, there seems to be interference, and we don’t know where it’s coming from… It became common knowledge that it was the Central Banks… It’s tough to adjust at the tops. With the bottoms, we are able to identify bottoms.”
And there you find the same thing I've said here over and over and over again: the market is not being shaped by normal buying and selling, it's being shaped by the Fed and the Central Banks.  They own it all now.  I recommended getting out of the stock market years ago - and did so with my own money, with the exception of two things that I can't get out of the market.  You may argue that I've lost money by not riding the flood of QE into the market.  In paper terms, at least, I have lost money.  My perspective is that one only makes or loses money when they sell.  If stock that I had in my account went up and down 1000%, if I didn't sell it when it was worth more than I paid, I haven't made anything.  And I think going up and down is all that's going on now. 

1 comment:

  1. In all fairness to the many prognosticators of the past who made inaccurate predictions it is difficult to predict the future and the economy. We may indeed be on the brink of a 1929 crash or we may not. If it were actually possible to predict then it could be prevented (assuming that those with the power actually wanted to prevent it). The biggest confoundng factor in economic predictions is free will. Everyone including the government, investors and banks will make decisions to mitigate the effects of a economic downturn to them. What seems to happen in the worst times is that the accumulation of bad decisions and bad investments like a massive row of dominos dominates the underlying economic reality and then no amount individual or institutional mitigation can prevent the toppling of dominoes. Is that where we are today? Are the dominos all lined up and the tipping point at hand? I honestly do not know but I do suspect it is true. To many unusual events, to many quick fixes, to much kicking the can down the road and to many secrets. For my part I say buy some extra food and silver and take other steps that would allow you to at the least survive the first three months of a economic collapse. Not that I think it will be fixed in three months but it will take that long (probably) for the government and social services to wake up and do something.