This is information that I recently wrote about in my client letter as well as discussed in the webinar Investing in Uncertain Times. It is a simple chart of the stock market or the Dow Jones Industrial Average.
It just shows the direction that the market has gone since the 1920's. So, it is a long, long-term look. Now, if you have never looked at a stock market chart, don't worry. It is easy to understand. If you have any questions, click here.
Fortunately, charts have a predictive value to them. Simply put, the stock market is a repeat offender of the same patterns. As Mark Twain so eloquently said, “History doesn’t repeat, it rhymes”.
Why does history rhyme and why does the stock market repeat patterns? (Note: a repeating pattern is when the stock market did the same thing in the same direction in the past as it is doing today.)
Human emotion never changes. Greed is greed, and fear is fear. Emotions cause us to act in predictable patterns. The stock market is nothing more than a conglomerate of human emotion pushing it up and down.
The markets move in long-term directions, intermediate-term directions, and short-term directions. The long-term direction is critical to get right and what I am showing you below. There is a moment in time when the long-term meets the short-term and I think we are there in that paradigm right now.
In my opinion this is the ultimate long-term indicator. It illustrates what the market looks like in the very long-term. It shows a history of the Dow Jones Industrial Average which is the oldest market we have on record dating back to the 1900’s. Here is the chart:
This is a picture of the stock market dating back to the 1900’s to today. It doesn’t get more long-term than this chart. Think of those outer two lines going left to upper right as a road and the middle line as the divider of that lane creating a two lane road. The stock market has been traveling on this road for a long time. In fact, it has stayed perfectly on the road.
For the most part the stock market started out on the road in the right lane. Then in the mid 90’s changed lanes to the left lane and has veered off to the far left of the lane more than a few times. The second time the stock market veered to the far-left lane it went all the way back to the middle lane. The market was steered off course by the financial crisis. Now we find ourselves in the far-left lane right now. Nothing good has ever happened when the market touches that upper blue line.
So, what do I see?
First, I see a stock market that on a long-term basis is very symmetrical. There are many who don’t give much credence to reading charts. I would challenge those who are skeptical to find disagreement with this chart. There are very few moments of truths when it comes to the stock market. This would be one of them.
Second, the chart seems to me like a completed pattern that embarked with the start of the most devastating bear market in history - the 1929 -86% decline. 1929 to 1932 will probably never be topped as the most devastating market decline in history. It is fitting that those two points would start the driving lane the Dow would travel on for the next 89 years.
Third, this chart tells me that we are going down, at a minimum to the middle line, or at worst case the bottom line. The middle line would equate to a drop of -40 to -50 which would be in line with a historical bear market decline. The bottom line would be a roughly -70% decline. Things would have to go off the rail for that to happen. As pessimistic about the market as I am, I don’t feel we drop too far below that middle line in the event that I am correct.
I will keep you posted on this picture. I think it tells us volumes of what could happen.