Mobster Al Capone once said of the 1929 stock-market crash: "I deny absolutely that I am responsible." Today, many strategists find themselves fighting off suggestions of a looming repeat of that long-ago market rout.
Rising to the surface again recently is the so-called "scary" 1929 crash chart that maps out market performance from mid-2012 to the present for the Dow industrials and compares it to 1928 and 1929.
The 1929 chart grabbed lots of attention in November. At the end of January, market timer Tom DeMark stirred the retro pot again by telling CNBC that stocks could "unravel quickly" in days and have reached an inflection point that resembles the period before 1929. Then Seabreeze Partners' Doug Kass (the man who has taken on Warren Buffett in another context) piped up in support.
MarketWatch's Mark Hulbert addressed the matter this week with this headline: "Scary 1929 chart gains traction." Readers haven't stopped coming for the chart and staying for the scare.
Hulbert dutifully analyzed the whole thesis. He took issue with the skeptics' argument that it's just a retrofitted chart and that the differences in scale between the two moves makes it a ridiculous comparison. (Critics say the chart takes prices from a historic boom and bust, and compares them to a much smaller boom.) His conclusion: Many were laughing last November but far fewer are laughing now.
And maybe Kass, DeMark and a few others are sticking to their guns, but some strategists are just doing the eye roll.
Downtown Josh Brown took the fascination with the 1929 comparisons to task a couple of days after DeMark let loose and retweeted his message after Hulbert's column appeared this week. "There's nothing constructive about suggesting that price patterns indicate the coming of the next Great Depression," concluded Brown in the blog post.
Here's one more look at the chart and a different way of slicing the material, courtesy of Bespoke Investment Group. The left is a copy of the one that's been going around. Note that the left Y axis, which represents the current rally, is at a vastly different scale than the right Y axis, which reflects the 1920s rally. Those divergent scales, say critics like Bespoke and Brown, give the perception that the market has been charting the same nose-bleed climb as it did in the 1920s. But if you normalize the two runs, graphing them as percent changes that both start at 0%, that similarity fades.
"The difference is the percentage advance in 1929, where it clearly went parabolic. The current rally from 2009, while mature, is much less extreme," wrote Brown.
More than laughter, there is downright annoyance among some analysts over this chart's rebirth. Here's what Raymond James's Jeffrey Saut said in his note on Thursday:
"I have been in this business for over 42 years, yet I do not ever recall getting as slammed with the same email as many times as I have about the attendant 1929 comparison chart. With the S&P 500 now off a mere 1.7% from its all-time high... investors seem exceptionally frightened by this 1929 'scary chart' comparison. Forget about the policy, structural, etc. mistakes that fundamentally caused the Great Depression, which are not present currently, the emotions stirred up by this chart have been amazing to me."
Saut harped on about scale and the apples-to-oranges comparison, and said he'd "seen this act before. The time period was the 1980s - 1990s when 'they' were trying to scale Japan's Nikkei Index to that of the D-J (Industrial).' All these kinds of chart shenanigans prove is that, 'Where you stand is a function of where you sit, or that you can make numbers do anything.' "
Alpari U.K.'s Craig Erlam said he's no chartist, but nothing he's seeing now justifies a selloff of the magnitude of 1929. Japan is still injecting plenty of cash into the market and an asset selloff, which played a big part in the rally last year, in response to tapering would be way overdone. A bigger correction than what's been seen so far? Sure, but other than that, he expects the correlation between these charts to break off pretty soon.
The view of technical analyst Andrew Thrasher is that maybe that stock prices could head lower if the same type of chart pattern that led to the 1929 crash developed now, but it won't be because we're mimicking what happened 85 years ago:
"In 1928, the Fed began to aggressively raise interest rates to combat, what was believed to be, overvalued stock prices. While you could argue that by the Fed tapering the QE stimulus it is in fact tightening monetary policy -- the Fed is still far from discussing raising benchmark rates."
Thrasher said he's got his eye on other potential dangers, such as any signs that margin debt is beginning to fall while stock prices are going up. He said that would be a signal that excessive bullishness is wearing thin and diverging from the equity uptrend, something seen when the market hit highs in both 2000 and 2007. Another concern is midterm election years -- this is one -- because they historically have produced bear-market bottoms in the second half of the year. And if the S&P 500 makes it back to 1,850 and divergences from breadth and momentum start to pop up, he will start to get nervous.
@sarge986's Stephen Guilfoyle said he considers the whole 1929 chart thing "entertaining," but is not buying any apples-to-apples comparisons. Another important point is that back in 1929, the DJIA was referred to as "The Market" and was the cornerstone of the investing universe:
"I don't think anyone considers that index to be as important in the modern era. Nowadays, when traders mention the market being up or down so many points in a day, they are referring to the S&P 500. The DJIA is really just an afterthought for most traders at this point," said Guilfoyle.
BTIG's Dan Greenhaus acknowledged in his note to clients late Thursday that he's once again being peppered by questions about the 1929 chart. The chart he discussed was an overlay of the 1928-29 chart and the S&P 500, but it's the same sort of thing:
"To repeat what we said in our 11.22.13 Bedtime with BTIG, this is a very lazy analysis. It's just too easy. Ignoring the fact that the scales are off, the fact remains that there is no statistical validity whatsoever to the chart. No predictive power, no insightful takeaways. None. It's a guessing game."
This isn't to say that people aren't talking about a correction out there, as our own Wallace Witkowski found that many stock-market skeptics have been talking about one for so long that maybe that doomsday scenario gives them something to talk about.
But as for 1929? To paraphrase the words of Capone, many strategists absolutely deny a connection.
-- Barbara Kollmeyer writes for MarketWatch. Follow her on @bkollmeyer
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