On Nov. 29, the stock market — specifically the Dow Jones Industrial Average — was the highest it had ever been. The housing market was at its highest since the 2007-2009 crash. The jobless market was as low as it had been in five years.
But let’s not forget the old phrase “What goes up must come down.”
We can be terrified by this phrase or embrace it. Let’s go over some facts from a well-respected analyst, then I’ll share my thoughts on how to potentially profit from it.
In the course of keeping up with various financial writings, I recently became aware of a fascinating price pattern analog uncovered by legendary technical analyst Tom DeMark. He figured out that the recent pattern of stock price movements looks a whole lot like the lead-up to the 1929 top.
A lead-up to just any old top is one thing, but the 1929 top was followed by a fairly memorable decline, which makes it all the more worthy of our attention.
The operating theory behind price pattern analogs is that similar market conditions can produce similar patterns; history repeats itself. The difficulty that most people have is in equating the market conditions from one period to another.
In 1928, for example, the Fed raised the discount rate as high as 5 percent. The stock bubble continued along merrily in spite of it, as the fad of chasing the latest hot stock captured the public’s imagination.
That Fed tightening of the late 1920s is not what is happening now, yet the pattern is nearly the same. This point suggests that it is not the “usual suspects” that are the driving force behind creating price structures. Something else must be the cause.
Not all periods are created equal. In the 1920s, and indeed until the early 1950s, the NYSE used to trade six days a week. So 1928, for example, had 295 trading days. 2012 had only 252 trading days, mostly because of the loss of Saturday trading. This issue of unequal calendars has to be accounted for in a good analysis.
One interesting implication of the pattern is that it shows that the equivalent of the Sept. 3, 1929, high is due Jan. 14. No one should take that date literally, however, since the pattern alignment fore or aft a few days still mirrors each other. And the market tends to only approximate the 1929 pattern rather than repeat it precisely. In other words, expectations of precision are just not realistic.
The approximate Jan. 14 date is all the more interesting in light of a couple of independent pieces of analysis that depict January 2014 as a top in the market.
So in short, there are several wholly unrelated technical disciplines pointing toward a big market top out in mid-January, just about the time when the current congressional agreement on the debt ceiling comes up again. Expect this to be a reasonable cause for investors to take pause in their enthusiasm.
With the Feds’ involvement in “printing money” to the tune of $85 billion a month, they were not likely to yank away the money gift at the recent meeting just a week before Christmas. There is, however, at a meeting late this month, a greater possibility for finding out that the markets may have to start living without the money infusion. The Federal Reserve Board’s Federal Open Market Committee meeting of March 18-19 fits right about where the Black Thursday crash of 1929 fits into this picture.
To see a lot of these reports, Google and check out The McClellan Report, and follow up with my dollar-cost averaging article in the May 2010 issue. This investment technique will help you survive this type of downturn in the market.
Worse case scenario: by you going into cash now and dollar-cost averaging into aggressive funds over the next year or two, you may miss out on a higher high than we have now, that is, if you believe the market can go higher.
Information in this column is not intended to be specific advice for anyone. You should use the information to help you work with a professional regarding your specific financial goals.
Capt. Mark A. Cline is a chartered senior financial planner. Contact him at +1 954-764-2929 or through www.clinefinancial.net. Comments on this column are welcome at firstname.lastname@example.org.