With Yellen at the helm, stock market paralleling 1928/1929

[NightHawkeye]

[url=http://www.marketwatch.com/story/scary-1929-market-chart-gains-traction-2014-02-11]Scary 1929 market chart gains traction - Opinion: If market follows the same script, trouble lies directly ahead | MarketWatch[/URL]

Today the market liked Janet Yellen supposedly.

 

[Vylo]

I wonder how long they played with the scaling on that to get it to match .

 

[SnowCal]

I wonder how long they played with the scaling on that to get it to match .

Haha. I was just about to say that.

The thread title is kinda silly. "With Yellen at the helm"? She's been sitting in that captain's chair for, umm, 8 days now? I'm not sure that's even a pixel on yer graph.

 

[grasping the after wind]

Haha. I was just about to say that.

Surely not as long as the Fed has played its game of getting the market to rise by artificially propping it up.

 

[EdwinWillers]

I wonder how long they played with the scaling on that to get it to match .

It's explained in the article

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’s DJIA +1.22% movement in 1928 and 1929, extends from below 200 to more than 400—an increase of more than 100%. The left axis, in contrast, represents a percentage increase of less than 50%.

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.

 

[contango]

Assuming past performance is a guide to future performance (which just about any financial investment will tell you isn't the case) it's still hard to know whether to expect a drop back to about 13000 (roughly level with the lower portions of the 1928-9 chart) or a drop comparable in percentage to 1928-9 (which would see the Dow going to 8-9000)

Going to 13000 would be ugly but would only be giving up a year or so of gains. 8-9000 would take us back to 2003-4 or so.

Of course the knock-on effects if some investments are sold to make margin calls on other investments are harder to gauge, as are ongoing losses caused by sales triggered by automatic stop-loss lines being crossed. That could have anything from minimal impact to the equivalent of a wrecking ball swinging back and forth.

 

[EdwinWillers]

Haha. I was just about to say that.

The thread title is kinda silly. "With Yellen at the helm"? She's been sitting in that captain's chair for, umm, 8 days now? I'm not sure that's even a pixel on yer graph.

There's always two ways to read something. True, Yellen recently taking the helm isn't necessarily related to the data thus far (though her influence certainly has existed). But with the market paralleling the gyrations it experienced in 1928/1929, should the parallel continue - Yellen will be at the helm as it does - which is itself an interesting parallel, given her beliefs on the use of the central bank to regulate the economy have their own parallel with those of Benjamin Strong's, whose central bank machinations prior to the depression were a major factor in it.

 

[keith99]

It's explained in the article

It is not explained, it is dismissed without real explanation.

Scale makes a huge difference in things like this, as do little things like margin requirements.

One huge key to the crash was margin calls. At that time you could buy stock by putting up just 10% and borrow the rest. A spot check today showed one broke requires 50% at the time of purchase and will call if it drops below 30%.

Huge difference and margin calls are a huge reason scale matters. Triggering margin calls depends on the percentage of drop. The bottom fell out of the market in 29 because once there was a significant drop the subsequent margin calls forced sale after sale.

So there is a double difference, first off the swings are not nearly as large percentage wise and second it now takes a larger percentage swing to trigger a cascade of margin calls.

 

[jayem]

Technical analysis (predicting future stock prices by analyzing past price trends) is voodoo. Technical analysts don't care about a company's revenue, or cash flow, or the balance sheet, or return on assets, or anything relating to actual business operations. They buy and sell based only on stock price fluctuations. Their usual focus is on shorter-term trading. That's speculating--not real investing. From what I've read, the best results come over the long term (meaning 10-20 years.) Especially by buying value stocks--whose prices are down, but still have a sound business model and strong finances. That's how Warren Buffett invests. And if you don't have the expertise to analyze a company's fundamentals (which I don't) then buy shares in a value-oriented mutual fund. Or in Buffett's company, Berkshire Hathaway (which I do.) Be prepared for ups and downs. (If it's a good company, when the price is down, the stock is an even better value. That's when you should buy more.) I'm convinced that over the next 10-20 years, you'll make money.

 

[AirPo]

Haha. I was just about to say that.

The thread title is kinda silly. "With Yellen at the helm"? She's been sitting in that captain's chair for, umm, 8 days now? I'm not sure that's even a pixel on yer graph.

It's explained in the article

Another objection I heard two months ago

 

[NightHawkeye]

Technical analysis (predicting future stock prices by analyzing past price trends) is voodoo. Technical analysts don't care about a company's revenue, or cash flow, or the balance sheet, or return on assets, or anything relating to actual business operations. They buy and sell based only on stock price fluctuations. Their usual focus is on shorter-term trading. That's speculating--not real investing. From what I've read, the best results come over the long term (meaning 10-20 years.) Especially by buying value stocks--whose prices are down, but still have a sound business model and strong finances. That's how Warren Buffett invests. And if you don't have the expertise to analyze a company's fundamentals (which I don't) then buy shares in a value-oriented mutual fund. Or in Buffett's company, Berkshire Hathaway (which I do.) Be prepared for ups and downs. (If it's a good company, when the price is down, the stock is an even better value. That's when you should buy more.) I'm convinced that over the next 10-20 years, you'll make money.

You are correct that the question is not about technical analysis but about fundamentals. The lack of fundamentals over the past couple of years has led many to question the irrational exuberance of the stock market's continued rise. At least in 1928/1929 the underlying fundamentals of the industries seemed to be sound.

If it's any consolation the scale of today's market rise is only about half that of 1928/1929 ... so the fall, if there is one, should only be half the size as well, right?

 

[Drekkan85]

More importantly you're measuring economic health by using the DJIA - which could be one of the stupidest things you could do.

The DJIA is a terrible barometer because it has so few companies, and it price weights instead of market cap weights.

Let's say you have two companies. Company A has 2 shares, each worth $50. Company B has 100 shares each worth $1. Both companies are equally valued from a market cap perspective - both are "worth" $100 total. However, the DJIA counts company A as worth $50 and Company B as worth $1. Which is ridiculous. Compared to the S&P which would count both as worth $100.

Now it gets worse. Say each share of Company A goes down by a dollar, and each share of Company B goes up by a dollar. On the DJIA this would have no impact - as the price weighting means that the dollar per share gain in Company A is offset by the dollar per share gain in Company B.

But this completely misrepresents what happened. Really the total VALUE of the market (as measured by market cap) has vastly increased. The increase in the share price of Company B has doubled their share price and their total value. The dollar loss for company A is only a drop of 2%. In our case example - the S&P would spike heavily up.

So why use the DJIA? Because people have been talking about it for a really long time. That's it. We'd all be much better off if we relegated it to the dustbin of history.

 

[NightHawkeye]

More importantly you're measuring economic health by using the DJIA - which could be one of the stupidest things you could do.

The DJIA is a terrible barometer because it has so few companies, and it price weights instead of market cap weights.

Let's say you have two companies. Company A has 2 shares, each worth $50. Company B has 100 shares each worth $1. Both companies are equally valued from a market cap perspective - both are "worth" $100 total. However, the DJIA counts company A as worth $50 and Company B as worth $1. Which is ridiculous. Compared to the S&P which would count both as worth $100.

Now it gets worse. Say each share of Company A goes down by a dollar, and each share of Company B goes up by a dollar. On the DJIA this would have no impact - as the price weighting means that the dollar per share gain in Company A is offset by the dollar per share gain in Company B.

But this completely misrepresents what happened. Really the total VALUE of the market (as measured by market cap) has vastly increased. The increase in the share price of Company B has doubled their share price and their total value. The dollar loss for company A is only a drop of 2%. In our case example - the S&P would spike heavily up.

So why use the DJIA? Because people have been talking about it for a really long time. That's it. We'd all be much better off if we relegated it to the dustbin of history.

I'd argue that the DJIA is even worse than you suggest. Market makers move so much in unison on events which negatively affect the whole market that everything goes down in unison. Recovery seems to be when the market separates good stocks from bad.

The practical differences between using either the DJIA or the S&P as a market indicator seems to be "small" ... at least compared to the monumental differences between the market in the 1920's compared to the modern market.

 

[EdwinWillers]

Originally Posted by SnowCal
Haha. I was just about to say that.

The thread title is kinda silly. "With Yellen at the helm"? She's been sitting in that captain's chair for, umm, 8 days now? I'm not sure that's even a pixel on yer graph.

Originally Posted by EdwinWillers
It's explained in the article

Another objection I heard two months ago​

You quoted Snow Cal, then quoted me as if I'd responded to him - only I didn't - I quoted Vylo, which makes your post an unfortunate misrepresentation of my comment.

 

[EdwinWillers]

It is not explained, it is dismissed without real explanation.

Scale makes a huge difference in things like this, as do little things like margin requirements.

One huge key to the crash was margin calls. At that time you could buy stock by putting up just 10% and borrow the rest. A spot check today showed one broke requires 50% at the time of purchase and will call if it drops below 30%.

Huge difference and margin calls are a huge reason scale matters. Triggering margin calls depends on the percentage of drop. The bottom fell out of the market in 29 because once there was a significant drop the subsequent margin calls forced sale after sale.

So there is a double difference, first off the swings are not nearly as large percentage wise and second it now takes a larger percentage swing to trigger a cascade of margin calls.

Actually, it is explained; moreover, margin calls have nothing to do with the scales of the graph.

 

[Jeffwhosoever]

Well, here is the fund to buy if history does indeed retrace its steps. Anyone who thinks the stock market trades on audited financial results hasn't done much investing. It's a combination of speculation and pure gambling.

ProShares ETFs: UltraShort S&P500 – Overview

 

[NightHawkeye]

Here is today's market update ...

... which continues to parallel the 1929 trajectory.

 

[EdwinWillers]

Actually, since someone mentioned buying stocks on margin earlier, this graph helps put that particular variable forth as another data point:

From another article with a truly scary title "Investors Euphoric as U.S. Margin Debt Reaches "Danger" Levels":

“Investors have rarely been more levered than today,” said Deutsche Bank, warning that the spike in margin debt is a “red flag” and should be watched closely.
The bank described this form of debt as “a tool used by stock speculators to borrow money from brokerages to buy more stock than they could otherwise afford on their own. If the stock rises, they end up making far more money. If the stock crashes, the opposite materialises. This kind of speculation is highly alarming.”

Another warning in the same article, which sort of sums it up:

He said the rise in margin debt is matched by leveraged excess across the system, with debt-driven buy-backs of corporate shares running at a $400bn annual rate. Leveraged buy-outs are back in vogue. Junk bond yields are near record lows.

“When everybody is jumping up and down and partying, that is the time to worry. Once the market turns nasty we could see a negative feedback loop. Debt is always a killer in the end,” he said.

 

[NightHawkeye]

Yikes.

That may be the ugliest financial chart I've ever seen.

 

[morningstar2651]

Monthly data through December 2113.

Good proof-reading.