#467 - Stock Market "Predictions" For 2019 Resemble 1929 Crash

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Jan 2, 20197m
#467 - Stock Market "Predictions" For 2019 Resemble 1929 Crash
Jan 2 '197m
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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about stock market predictions for 2019 and why it might resemble the 1929 crash. I want to go through a chart here on today's podcast as we start off the New Year and just potentially lay the groundwork for a possible scenario of where the markets could be going in 2019. Now, as many of you guys know and if you’ve traded through the end of 2018, the markets had quite a wild ride to the end of 2018 and we saw a lot of volatility in both directions as we closed out the last year. As we start to look towards 2019, the question becomes – Where does the market go from here? And this is just my opinion on it. Obviously, we have no idea where the market goes. But my opinion on it is that I think that we are at the top of a cyclical bear market and this is interesting because we don't have one major catalyst yet that is turning over the markets. In fact, it seems to be a lot of different things. There's news from Apple and news from Tesla and the oil markets are depressed and emerging markets are depressed. And so, there's a lot of things that are kind of happening and revealing themselves in the middle of what I think is the next cyclical bear market down. And so, this is important because as investors and traders, we have to understand when these cyclical bear markets come, these massive bear market moves, how might they develop, how might they unfold over time. And I don't think that this particular move that we’re in right now was going to be a major crash straight down and then straight back up like we saw in 2008, 2009. 2008, 2009 I think was a little bit different in the sense that we crashed pretty hard and then we rebounded just as hard and I don’t think we’re going to be going through that. I think what we’re going to see this time around is something that might resemble the 1929 crash and the ensuing decline in the markets that happened over the next two and a half years.

What most people don't know and I’ll go through this kind of chart here. You can search this chart online and just kind of look at the Dow Jones industrial average during the depression in the crash of 29 and basically 32. But what most people don't know is that the crash in 1929 was just really the tip of the iceberg. In fact, when the Dow went from about 375-ish points down to around 200 points which is by no means a small move by any chance, that was just the tip and in fact, the most of the move that the Dow had over the next two and a half years actually led it to decline the rest of the percentage down to about a 90% decline from peak to trough basically. And what's interesting is if you go back and you look at the percentage moves during this big 90% massive bear market, you have a lot of very strong, very aggressive bull markets in between or kind of bullish moves in between. The initial drop in the Dow that happened in 1929 was followed by a 48% rally in stocks in just about four and a half months and that's a pretty big move. And again, what I think is interesting about the 1929 crash and why I'm just kind of keeping this in the back of my mind as we go through the next couple of years is that there's a lot of opportunities and a lot of news coming out that could’ve led investors to be uber-bullish on the markets. And so, you follow a big market decline and then you have a 48% rally off the bottom, that probably sucked in a lot of people that had a false sense of security and became very much a classic bullish trap because after that, then the Dow declined and took on its lows and then as we started to get into the early to middle part of 1930, we saw another rally of 16% followed by another massive decline that took out the lows, another rally at the end of 1930 of 21%, again, followed by another massive decline that took out the lows, another rally in the middle part of 1931 of 27% and then again, another rally after taking out the lows of 35% in the middle of 1931. And then as we get to the end of 1931, this train still doesn't stop. We still see massive rallies followed by pretty significant selloffs that take out the lows. And so, as we get to the end of 1931, we saw again, another rally of 35% followed by more selling that took out the lows, another rally at the end of 1931 of 20%, again, followed by the final blow, the final down move in the markets that took out the lows and it wasn’t until the middle of 1932. Basically about three and a half years that we finally saw a significant rally enough to make a bottom in the markets during this time period.

Again, the reason I go through this and I talk about all these different numbers and percentages is just to let you know that within one massive bear market, we can find many bull markets and this is interesting for two reasons. One, so that we know that there's generally going to be a two-sided market and we don't know to what extent markets are going to move, but we know that markets are going to be two-sided even in the face of a massive cyclical bear market and two, to understand that maybe we shouldn't get sucked into either direction, that we should play things pretty close to our chest, that we should reduce our duration, meaning trade shorter term securities generally. We don't want to go out 90 days. We want to stay around the 30 to 45-day window, so that we have time to quickly adjust and move with the market as the market moves whatever direction it goes. And so, again, I thought this was interesting as we started off the year. Again, I have no idea where the market’s going to go. I’m not making this major bold prediction, but if we are in the middle of a cyclical bear market which is what I believe, then I think that we could find many bullish market moves here and I think we just have to be careful and cautious not to get sucked into any one direction and still maintain our overall neutral bias. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

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