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Black Monday: Ancient History Or Imminent Future? at Trader’s Narrative

Guest Post by Nico Isaac

The following article includes analysis from Robert Prechter’s Elliott Wave Theorist. For more insights from Robert Prechter, download the 75-page eBook Independent Investor eBook. It’s a compilation of some of the New York Times bestselling author’s writings that challenge conventional financial market assumptions. Visit Elliott Wave International to download the eBook, free.

Once upon a time, the term “Black Monday” was to Wall Street what the name “Lord Voldemort” was to Hogwarts. It turned the air freezing cold and sent traders flinching around every corner in fear of a repeat of the October 19, 1987 or October 28, 1929 meltdown.

Case in point: The 2008 “Black Monday” anniversary. At the time, the U.S. stock market was locked in a ferocious downtrend that included regular, triple-digit daily declines of 400 points and more. Needless to say, when the final two Mondays of October arrived, the least superstitious investors surrounded their portfolios with more good-luck talismans than a Bingo player. See October 19, 2008 AP headline below:

“Black Monday: Stocks Sink As Gloom Seizes Wall Street. Prolonged Economic Turmoil” is seen.

That was then. Today, the usual dread surrounding the back-to-back string of “Black Mondays” is nowhere to be found. In its place, media reports abound of a new, global bull market “shrugging off,” “ignoring,” and “making a distant memory” of the event.

For one, “gloom” hasn’t “seized” the U.S. stock market in quite a while; from its March 2009 low, the Dow has risen more than 50% to above the psychologically important 10,000 level. For another, the mainstream experts insist that today’s financial animal is unrecognizable to that of 1987, and especially 1929. In their eyes, it’s a completely different — i.e. safer, smarter, and sounder system.

We beg to differ.

See, while the usual experts want to put as much mental distance between today’s market and those that facilitated the 1987 recession and 1929-1932 Great Depression — the physical similarities are impossible to ignore; more so, in fact, to the latter scenario.

Here, the October 2009 Elliott Wave Financial Forecast presents the following news clip from the October 25, 1929 New York Daily Investment News.

1929 newspaper front page

Now, take a look at these headlines from the week of October 12-17, 2009:

“The Great Recession Is Over.” (Reuters)

“80% of Economists Say The Worst Is Behind Us.” (CNN Money)

“The Bull Is Back” (AP)

“The Economic Recovery Is Well Underway” (Wall Street Journal)

They’re interchangeable — Eighty years later.

Along with a similar extreme in bullish sentiment, the performance of stocks between now and the 1929 situation is cut from the same cloth. After an initial plunge from August 1929 through late October 1929, the US stock market enjoyed a powerful rally well into the following year. NOW: After a steep freefall from its October 2007 peak, the US stock market is once again enjoying the fruits of a powerful rally back to new highs for the year.

Also, on closer examination, the October 19 Elliott Wave Theorist (EWT) uncovers an even deeper parallel between the 2009 rally and the 1929-30 one. Here, EWT presents the following snapshot of the Dow during the Depression-era advance:

1929 crash post mortem graph EWI

As Bob Prechter points out — in 1930, stocks rallied to the level of the preceding year’s gap. Bob then reveals that the same level has been reached now.

So, we all know how the 1930 rally ended. The question is whether the 2009 advance will experience the same fate. As Bob explains in the Theorist, the only way to know for certain is to “look at the reality of the situation.”

For more information, download Robert Prechter’s free Independent Investor eBook. The 75-page resource teaches investors to think independently by challenging conventional financial market assumptions.

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8 Responses to “Black Monday: Ancient History Or Imminent Future?”  

  1. 1 Alec

    Are you going to put your credibility on the line for this?

  2. 2 Babak

    Alec, you’re assuming too much.

  3. 3 Nick

    One of the causes of the current stock market rally and the high P/E ratios of many stocks is the low interest rates and quantitative easing by the Fed.

    But the quantitative easing by the Fed is scheduled to end in the first quarter of next year. And the US government is planning to sell a lot more US treasury bonds throughout next year and for years to come after that. Which could easily lead to high US bond interest rates. And high interest rates would certainly attract a lot of money out of the high P/E stocks and into US government bonds.

    It all depends on how quickly bond interest rates go up and how quickly the stock markets will react to that. If bond interest rates go up quickly and go up a lot. Then it’s quite possible that a stock market crash would follow, even if the economy isn’t doing quite as badly as it did during the Great Depression.

  4. 4 wayne

    Babak, glad to finally see another comparison to 1929. It had been a couple months and I was getting concerned. I feel much more comfortable now.

    Can’t argue with you Nick. But we have so little history of how interest rates rising from zero will impact the stock market. The normal rule is three steps and a tumble. But will that apply if interest rates are coming from zero? Are 1% interest rates competition for a market that will be yielding 4-4.5% by year end. I wouldn’t be surprised if the market rallies after the first hike, maybe a one day pullback after the second, a one week pullback after the third, then some major headwinds thereafter.

    I have stated in here before that I thought rates should already be headed back to 1%. LEI has been in strong uptrend for 6 straight months. Today’s GDP confirmed LEI’s trend.. Not that the Fed should be tightening the noose, but simply working from the current crisis mode to a normal accommodative mode (1-1.5%).

  5. 5 Jim

    wayne, if it’s up to Bernanke, he’ll wait too long to raise rates; it’s a lesson he thinks he learned from the 1930s.

  6. 6 wayne

    Jim, understood. I think fed rates should be going back to a very accommodative 1% by Springi. I wasn’t predicting that they would. If we can take Bernanke at his word, he has stated almost unequivocally and unusually blunt for a Fed Chairman that Fed rates wouldn’t be going back up soon. He also said 3 months ago in an interview that his biggest fear was that his legacy would be one of being remembered as the Fed Chairman that resided over the Depression of the 21st century. One of the unfortunate characteristics of our system, is that he has the option of being a short termer and leaving it up to the next Fed Chairman to worry about the consequences of runaway inflation. Of course if Tbills start up without him, he may have no choice but to eat his words. It will be interesting to see how Retailers fare during the holidays with 10% unemployment.

    Economics is so interesting, because although it is cyclical, it never exactly repeats itself. Who would have guessed a decade ago, that we would soon see gold above 1000, oil in a strong uptrend and interest rates at 0.1%.

  7. 7 MachineGhost

    Stupid comparison. 2009 to 1929? The proper comparison is 2009 to 1930.

    I wish you’d stop posting Prechter’s perma-bear-guru B.S. all the time. Or, at least move the byline to the bottom of such articles so it stops annoying people.

  8. 8 Babak

    MachineGhost, permabear? did you know he was one of just a handful who were bullish in late Feb/early March and caught the vast majority of this huge rally? No one has a crystal ball or a perfect track record but credit where credit is due my good man.

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