This market chart is absolutely terrifying

If stocks continue to follow the same eerie script, trouble lies directly ahead.

By MSN Money Partner Feb 11, 2014 2:15PM
Man making faces from behind laptop © James Braund, Digital Vision, Getty ImagesBy Mark Hulbert, MarketWatch

There are eerie parallels between the stock market's recent behavior and how it behaved right before the 1929 crash.


That, at least, is the conclusion reached by a frightening chart that has been making the rounds on Wall Street. The chart superimposes the market's recent performance on top of a plot of its gyrations in 1928 and 1929.


The picture isn't pretty. And it's not as easy as you might think to wriggle out from underneath the bearish significance of this chart.


I should know, because I quoted a number of this chart's skeptics in a column I wrote in early December. Yet the market over the last two months has continued to more or less closely follow the 1928-29 pattern outlined in that two-months-ago chart. 


If this correlation continues, the market faces a particularly rough period later this month and in early March. (See chart below, courtesy of Tom McClellan of the McClellan Market Report; he in turn gives credit to Tom DeMark, a noted technical analyst who is the founder and CEO of DeMark Analytics.)

One of the biggest objections I heard two months ago was that the chart is a shameless exercise in after-the-fact retrofitting of the recent data to some past price pattern. But that objection has lost much of its force. The chart was first publicized in late November of last year, and the correlation since then certainly appears to be just as close as it was before.


To be sure, as McClellan acknowledged: "Every pattern analog I have ever studied breaks correlation eventually, and often at the point when I am most counting on it to continue working. So there is no guarantee that the market has to continue following through with every step of the 1929 pattern. But between now and May 2014, there is plenty of reason for caution."


Tom Demark added in interview that he first drew parallels with the 1928-1929 period well before last November. "Originally, I drew it for entertainment purposes only," he said -- but no longer: "Now it's evolved into something more serious."


Another objection I heard two months ago was that there are entirely different scales on the left and right axes of the chart. The scale on the right, corresponding to the  Dow Jones industrials ($INDU) movement in 1928 and 1929, extends from below 200 to more than 400 -- an increase of more than 100 percent. The left axis, in contrast, represents a percentage increase of less than 50 percent.


But there's less to this objection than you might think. You can still have a high correlation coefficient between two data series even when their gyrations are of different magnitudes.


However, what is important, McClellan said, is that the time scales of the two data series need to be the same. And, he stresses, there has been no stretching of the time dimension to make them fit.


One of the market gurus responsible for widely publicizing this chart is hedge-fund manager Doug Kass, of Seabreeze Partners and CNBC fame. In an email earlier this week, Kass wrote of the parallels with 1928-29: "While investment history doesn't necessarily repeat itself, it does rhyme." And, based on a number of indicators rather than just this chart drawing the 1928-29 parallel, he believes that "the correction might have just started."


DeMark is even more outspokenly bearish. If the Standard & Poor's 500 Index ($INX) decisively breaks the 1762 level, he told me, then a major bear market will have only just begun.


You may still be inclined to dismiss this. But there were many more were laughing last November when this scary chart began circulating. Not as many are laughing now.


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53Comments
Feb 11, 2014 3:53PM
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The chart really doesn't matter, does it?  We all know what is coming with a record low labor participation rate, no real jobs being created just low paying service jobs, housing sales increasing only because hundreds of thousands of homes are being purchased by investors for rental, record number of food stamp recipients, record poverty and that is just the beginning. 
Feb 11, 2014 3:02PM
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Let's check back on this in a few months and not forget about it. 
Feb 11, 2014 3:13PM
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If it looks like a duck and quacks like a duck what do you call it?

 

The only thing I can tell that the markets are standing on is QE3 and cost cutting. The race to the bottom has killed demand and the bets are in on the "emerging markets".  The problem there is most of those markets have been emerging for decades and hasn't for one reason or another - most notably they have experienced what we're experiencing now. The fact of the matter is the scales are overtipped to just a few and while everyone lives as a lowest common denominator there is little demand and that dynamic is now so widespread I don't how it will end.

 

The bear is about to run loose and I can only hope we come out of it smarter and wiser and not too badly mangled.

 

We haven't seen economic norms or principles followed in decades and now the fruits of that endeavor are going to hurt us all. What is money worth when your neighbor no longer has any or values it? 

Feb 11, 2014 4:39PM
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Correlation does not equal causation. I read the article, but never found an explanation of WHY there would be a crash. The WHY would be necessary for any real analysis. But this isn't analysis, it's just a sorry sack-o... 

Some cherry picked data points and a warped scale to make it all line up? Doesn't mean a thing.
Feb 11, 2014 4:25PM
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In 2013 stocks had their best run since 1995, after a decade of under performance and the worst recession since the Great Depression, and suddenly people are saying it's like 1929 again? 
Feb 11, 2014 3:46PM
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If the market believes this chart is forecasting a crash then everyone will sell creating a crash.
Feb 11, 2014 4:08PM
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Without any actual economy to sustain, markets collapse. It's not the first time in history. It is the first time the whole world bought Inflationist Kool Aid and sold all the farms collectively. Every viable skill set is destitute. There is no historic record of paper and button pushing doing anything more than to waste paper and wear out buttons. Administratively-financially dominated societies always end badly. A crash is the soft ending. 
Feb 11, 2014 4:54PM
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THIS SHOULD BE A WARNING TO INVESTORS  THE FEDS ARE THE ONLY  THING KEEPING THE  MARKET  ALIVE
Feb 11, 2014 3:09PM
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Are you kidding me.. that chart is all wrong.  The 28-29 side has 200 to 400.  The current side (left) goes from 12400 to 17, 200.  One is 100% range, the the other is less than  50% range.  The directions MAY correlate but the size of the moves don't. 
Feb 11, 2014 5:43PM
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The market this time is lagging (due to the Fed pump room) the underlying economic reality.  With real unemployment at over 15%, the bears will  be coming home to claw your paper ASSets up.
Feb 11, 2014 5:59PM
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Back in the 1920's PEOPLE were gambling on the market.  Today, its the "treasury".  There is a big difference.  Unfortunately, you still have to "pay the piper" and when you are paying out 85 BILLION PER MONTH to the same crooks that crashed the market in 2008 and you have been doing so for the past 5 years while the "elected" president has NO plan, this brings about a round of "not so good".
Feb 11, 2014 5:25PM
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The meek shall inherit this earth, and those who reap abundantly now will wish that they hadn't.
Feb 11, 2014 9:13PM
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You cannot help the poor by destroying the rich. Well the rich had no problem destroying the poor.

You cannot strengthen the weak by weakening the strong. You are assuming they are strong.

You cannot bring about prosperity by discouraging thrift. The same folks talking about it are doing everything to stop anyone else from having any.

You cannot lift the wage earner up by pulling the wage payer down. Bringing the wage gap back to 40 to 1 from 400 to 1 is hardly pulling down any farce wage payer.

You cannot further the brotherhood of man by inciting class hatred. The SuperRich started this Class Warfare but the poor and the middle-class will end it.

You cannot build character and courage by taking away people's initiative and independence.
Who's taking away others initiative and independence, that's stupid talk.

You cannot help people permanently by doing for them, what they could and should do for themselves. Duh, how long did it take you to figure that part out. That's been known for thousands of years. This guy just figured it out.

Funny how those whining about class Warfare are the one's that started it. Now they are terrified their deeds will come back to bite them. The sooner the better.

Feb 11, 2014 5:59PM
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When the stars align with Jupiter and the cow jumps over the moon watch out Chicken Little. 

Mr. Bill, may we have your thoughts on the matter...OHHHHHHH NOOOOOOO!!!

Feb 11, 2014 7:26PM
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Chicken or the Egg:


I wrote this "Same" comparative 1 day ago and posted it on MSNBC response:Graphs comparing 1929 to 2014. Mine extended the years to include 1914-1929  DOW graphs compared to 1999-2014 DOW graphs. My first comparative was written in "Sept of 2013" before 4th quarter. Since then, the graphs are an even more frightening resemblance then previously viewed ..


I wish I could have gotten some sort of recognition for writing it by this author, but at least, with this article out the "DOW Graphs" will be seen by more people ..Which will allow you to come to your own conclusion of where the DOW is heading..


Thanks Mark..

Feb 11, 2014 9:14PM
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We the sheep can make it crash if we all sell creating opportunities for others.
Feb 11, 2014 4:23PM
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Oops!  Headline on Variety after the crash..."Wall St. Lays an Egg"...papa Joe Kennedy got out just before that October day and left Hollywood and Gloria Swanson too.  No wonder the huge family lived like a Ralph Lauren ad during the 1930s.  I've heard and read dire predictions of another crash off and on for many years. 
Feb 11, 2014 7:52PM
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Did anyone read Dr. Ravi Batra's predictions about 20 years ago- "the great depression of 1990" full of plots just like this, and nothing happened (read about him on Wikipedia).  People get famous and often rich making predictions.  Look for underlying issues, not a similarity to a plot that happened 80 years ago.  I bet if you played with the charts you could find other things just like the last two years that would look very similar.
Feb 11, 2014 9:05PM
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It's asinine to talk about,

"We all know what is coming with a record low labor participation rate, no real jobs being created just low paying service jobs, housing sales increasing only because hundreds of thousands of homes are being purchased by investors for rental, record number of food stamp recipients, record poverty and that is just the beginning."

while intentionally leaving out Record Corporate Profits and Cash Hoard plus Record Individual Wealth. So tell me, what is coming because Folks have been Wrong going on 5 years now.
Feb 12, 2014 9:37AM
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It looks to me like you are stretching a time period to make it fit. Just more baloney someone is always comparing the market with 1929.


Fact is several other factors will trash the economy and among them are terrible stupid meddling politicians. Politicians serve only their own self interest.

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