Re: 1929 deja vu

Date: Fri Apr 21 2000 - 17:49:50 MDT

Forrest Bishop forwards from

> The Fingerprints Of A Secular Top?...No matter how wild this market action
> seems, once again, this type of activity is not without precedent.
> As you know, market periods exhibiting characteristic similarity are ones found
> in historical extreme circumstances. A week or so ago, we
> trotted out our "return engagement" chart for the price volatility surrounding
> the '29 final top period. There were a few days in the current market two weeks
> ago that were dead ringers for a few days of activity directly preceding the
> "final bell" in 1929. Well if you thought that similarity was eerie, what till
> you see what happens next:

Interesting to look at their chart from 1929:

         Inter Day Closing %, Intra Day Trading Range

    10/23/29 -6.3 8.0
    10/24/29 -2.1 13.2
    10/25/29 +0.6 3.5
    10/28/29 -13.5 14.8
    10/29/29 -11.7 18.5
    10/30/29 +12.3 13.4
    10/31/29 +5.8 8.9
    11/4/29 -5.8 6.6
    11/6/29 -9.9 11.4
    11/7/29 +2.6 10.5
    11/8/29 -0.7 4.5
    11/11/29 -6.8 7.3
    11/12/29 -8.9 8.9

The middle column is the change in closing price, the right column is the
difference between the high and low for the day.

This does have something of a resemblance to the last two weeks, at least
on the NASDAQ. Last week we saw 3 big drops, a little drop and a little
gain, similar to the first five lines. This week we saw two up days,
big then small, then two small down days, broadly similar to the next
four lines.

On the other hand, at 9 days into the 1929 series above the index was
down 30%, while NASDAQ is only down 20% over the previous nine days.
That's a pretty significant difference, especially in terms of market
psychology. Also, although the NASDAQ gets a lot of publicity, the Dow
industrials have not followed the above pattern very closely at all.
The Dow is down only about 4% over the last two weeks. Those big
industrial companies add inertia and stability to the economy as a whole.

> 6. Are all the contrarian signs there for a meltdown in the broader tech
> groups? YES History shows that there has NEVER been an
> instance where a financial mania or asset bubble has ended in any way other than
> badly. There are no soft landings for asset bubbles.

Two things: first, it's not clear that this is an asset bubble. People
are trading in these companies in the hope of near-term gains, yes.
But underlying these hopes, investors see long-term prospects for future
technology growth. Those companies that are blazing the trail into
new technologies are the ones which investors hope will be the market
leaders of tomorrow. Calling it an asset bubble is really a matter of
second-guessing the market, the collective opinions of all those people
investing out there. That's not an easy trick to pull off.

Second, as far as hard landings: through most of history there has not
been the understanding that we have today of macroeconomics. Yes, there
is still much to be learned, and people do not always behave predictably.
But at the same time we can't deny the effectiveness of the US Federal
Reserve over the last two decades in moderating the business cycle and
keeping the economy on a generally even keel.

Stock prices may fall and even crash eventually, but we should not expect
a 1930s style depression as a result. The economic policy mistakes
of the time are well understood today. There may be a slowdown as
the excesses of the boom times get cleared from the system, but there
is no reason to expect it to be particularly severe or long lasting.
The demographic factors which are driving investment today will remain,
and progress in new technologies will not stop. There is still every
reason to expect significant, possibly unprecedented, economic growth
over the next few decades, based on technology. Ultimately that can
support very high valuations.

> 7. Is the stock market rational? From a long term perspective, the answer
> is YES. Short term movements are anything but rational. The
> market is an exercise in crowd behavior. Today, it is simply an online study in
> human nature.

What is "short term"? The stock market has been overvalued by
conventional measures for years. Fed chairman Greenspan started
expressing alarm about 1995. It's tough to square allegiance to market
rationality with the belief that for 5+ years the market has been
foolishly caught up in an asset bubble.


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