The Worst Case Scenario - Part II
January 31st, 2008 by admin
Back in early 2000, somebody overlapped the NASDAQ chart with that of the Dow going into the 1929 crash. They were almost identical - except that the NASDAQ had much further down to go. The market pundits said: NO-O-O-O WAY! 2000 is NOT 1929, too many safeguards in place now which we did not have back then to prevent the meltdown. The rest is history.
Since it tends to repeat itself, I thought it would be interesting to compare what the markets did AFTER the crash - then and now. Now, these comparisons do need tweaking. Back then the Dow was the leading index. The NASDAQ led in the 90s, so it only made sense to compare the declines between those two. However, it’s best to use the S&P 500 for the post 2000 crash recovery as it was led not by technology but by financials and basic materials.
The Dow made a double bottom in late 1932 - early 1933. So did the S&P 500 in late 2002 - early 2003. The Dow then rallied through the rest of 1933 before correcting in the first half of 1934. So did the S&P 500 in 2003 - 2004. The Dow rallied through the rest of 1934, and all of 1935 and 1936 before turning down sharply in late 1937. So did the S&P 500 in 2004 - 2007. The Dow looks pretty nasty in the first part of 1938 before stabilizing and recovering somewhat in the second half. Well, that’s where the S&P 500 is right now. The 1937-38 correction took the Dow all the way down to the 1934 levels. That’s about 1,150 for S&P 500, give or take.
Now, this is not a prediction. And, again, the argument can be made that I am leaving out too many variables. Could be. This is simply a worst case scenario based on the assumption that chart patterns repeat as they reflect human behavior. It simply pays to be prepare.
Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of proprietary trading data that swing traders can put to work right away. http://www.tradingzoom.com/
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