Scary 1929 Market Chart Gains Traction Mark Hulbert MarketWatch February 11, 2014 Opinion: If market follows the same script, trouble lies directly ahead There are eerie parallels between the stock market’s recent behavior and how it behaved right before the 1929 crash. That at least is the conclusion reached by a frightening chart that has been making the rounds on Wall Street. The chart superimposes the market’s recent performance on top of a plot of its gyrations in 1928 and 1929. The picture isn’t pretty. And it’s not as easy as you might think to wriggle out from underneath the bearish significance of this chart.
I should know, because I quoted a number of this chart’s skeptics in a column I wrote in early December. Yet the market over the last two months has continued to more or less closely follow the 1928-29 pattern outlined in that two-months-ago chart. If this correlation continues, the market faces a particularly rough period later this month and in early March. (See chart, courtesy of Tom McClellan of the McClellan Market Report; he in turn gives credit to Tom DeMark, a noted technical analyst who is the founder and CEO of DeMark Analytics.) One of the biggest objections I heard two months ago was that the chart is a shameless exercise in afterthe-fact retrofitting of the recent data to some past price pattern. But that objection has lost much of its force. The chart was first publicized in late November of last year, and the correlation since then
certainly appears to be just as close as it was before. To be sure, as McClellan acknowledged: “Every pattern analog I have ever studied breaks correlation eventually, and often at the point when I am most counting on it to continue working. So there is no guarantee that the market has to continue following through with every step of the 1929 pattern. But between now and May 2014, there is plenty of reason for caution.” Tom Demark added in interview that he first drew parallels with the 1928-1929 period well before last November. “Originally, I drew it for entertainment purposes only,” he said—but no longer: “Now it’s evolved into something more serious.” Another objection I heard two months ago was that there are entirely different scales on the left and right axes of the chart. The scale on the right, corresponding to the Dow’s DJIA +1.22% movement in 1928 and 1929, extends from below 200 to more than 400—an increase of more than 100%. The left axis, in contrast, represents a percentage increase of less than 50%. But there’s less to this objection than you might think. You can still have a high correlation coefficient between two data series even when their gyrations are of different magnitudes. However, what is important, McClellan said, is that the time scales of the two data series need to be the same. And, he stresses, there has been no stretching of the time dimension to make them fit. One of the market gurus responsible for widely publicizing this chart is hedge-fund manager Doug Kass, of Seabreeze Partners and CNBC fame. In an email earlier this week, Kass wrote of the parallels with 1928-29: “While investment history doesn’t necessarily repeat itself, it does rhyme.” And, based on a number of indicators rather than just this chart drawing the 1928-29 parallel, he believes that “the correction might have just started.” DeMark is even more outspokenly bearish. If the S&P 500 SPX +1.11% decisively breaks the 1762 level, he told me, then a major bear market will have only just begun. You may still be inclined to dismiss this. But there were many more were laughing last November when this scary chart began circulating. Not as many are laughing now.
Yellen: Continued Pullback In Federal Reserve Stimulus Likely cbsnews.com February 11, 2014 Federal Reserve Chair Janet Yellen sought Tuesday to reassure investors that she will support the approach to interest-rate policy that her predecessor, Ben Bernanke, pursued before he stepped down as chairman last month. Yellen told Congress that if the economy keeps improving, the Fed will take "further measured steps" to reduce the support it's providing through monthly bond purchases. In her first public comments since taking over the top Fed job last week, Yellen said she expects a
"great deal of continuity" with Bernanke. She signaled that she supports his view that the economy is strengthening enough to withstand a pullback in stimulus but that rates should stay low to further improve a stilllackluster economy. Yellen's remarks, delivered to a House committee, suggested that the Fed will keep its key shortterm rate near zero for a prolonged period. "The recovery in the labor market is far from complete," Yellen said, an indication that the Fed is in no hurry to boost short-term rates. That message should be reassuring to investors. In her remarks, Yellen said the Fed is monitoring volatility in global markets but doesn't think it poses a serious risk to the United States at the current time. "Since the financial crisis and the depths of the recession, substantial progress has been made in restoring the economy to health and strengthening the financial system," Yellen said in her testimony for the House Financial Services Committee. "Still, there is more to do." Paul Ashworth, chief North American economist for Capital Economics, said in a statement, “We broadly agree with her judgment that the recent turmoil in some emerging markets ‘do not pose a substantial risk to the US economic outlook.’ In particular, the risk of a pandemic sweeping through emerging markets indiscriminately is low.” Yellen, the first woman to lead the central bank in its 100 years, is delivering the Fed's twice-a-year report to Congress a week after being sworn in to succeed Bernanke. He stepped down Jan. 31 after eight years as chairman. Many economists think the Fed bond buying, which totaled $85 billion a month during 2013, will be reduced in $10 billion increments this year until the purchases are eliminated in December. After the two $10 billion cuts in December and January, the level of bond buying stands at $65 billion. The purchases of Treasury and mortgage bonds are aimed at stimulating the economy by keeping longterm borrowing rates low. Yellen repeated the Fed's assurances that it intends to keep its key short-term rate near zero "well past" the time the unemployment rate drops below 6.5 percent as long as inflation remains low. Many economists don't expect short-term rates to be increased until late 2015. The unemployment rate in January fell to 6.6 percent, the lowest point in more than five years. Still, in her testimony, Yellen said unemployment remained "well above levels" that Fed officials think are consistent with its goal of maximum employment. She said the job market still faces problems.
"Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed," she said. "The number of people working part time but would prefer a full-time job remains very high." The emphasis on the long-term unemployment rate marks a “change of tone with regards to the labor market” from Bernanke, noted Ian Shepherdson, chief economist for Pantheon Macroeconomics. He added that “the battle lines are drawn” for the point when, either later this year or next, unemployment falls below 6.5 percent. Still, in her testimony, Yellen stuck closely to the positions taken by Bernanke. She noted that she had served on the Fed's policy committee and worked with Bernanke in developing the central bank's policies. "I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability," Yellen said. She said the Fed expects the economy to expand moderately this year, with unemployment continuing to fall and inflation moving up toward the Fed's 2 percent target. Yellen's testimony comes before she has presided over her first meeting as Fed chair. That will occur March 18-19, after which she will hold her first news conference. The Fed's three rounds of bond purchases have driven its holdings above the $4 trillion mark - four times its level before the financial crisis struck with force in 2008. The prospect of a continued pullback of the Fed's bond purchases has had an outsize effect on financial markets. It has triggered concerns that many emerging market countries won't be able to withstand the withdrawal of foreign capital. Investors have yanked money from emerging economies from Turkey to Argentina. They've done so in part because they fear that a pullback in the Fed's stimulus will send U.S. interest rates up and draw investor money from overseas in search of higher returns. The U.S. stock market, which finished 2013 at record highs, has had a tough start to the new year. Investors have grown concerned about a string of tepid reports calling into question hopes that 2014 would be a turnaround year in which economic growth finally kicked into higher gear. Yellen's testimony came after a Labor Department jobs report Friday showed that the economy added only 113,000 jobs in January after an even more disappointing 75,000 jobs were added in December. CBS/AP What Is a Gold Standard? VIDEO BELOW http://www.youtube.com/watch?feature=player_embedded&v=LdyHso5iSZI Why Not Print More Money? VIDEO BELOW http://www.youtube.com/watch?v=ZkyBnaYCUhw
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