About that 1929 Chart…The Details Matter

A big fuss has been made in recent days about the analog chart comparing the current market rally to the 1929 rally (I posted a brief snippet here which did not come close to detailing why I am not a big fan of the chart).  Many of these pieces are based on a misunderstanding that I think is worth clarifying.  First of all, the 1929 chart looks frightening because 1929 was obviously a horrible market environment in which the Dow fell by over 40% in about a month.  The biggest criticism of the chart is that it can be interpreted to imply that we’re on the verge of a similar market decline.  There are a lot of problems with implying such a thing, but we also have to be careful about jumping to conclusions here because the details surrounding this chart are important and potentially useful.

This chart first appeared late last year when Tom McClellan posted it to his site.  I post Tom’s material here at Pragcap on occasion and find it to be of consistently high quality.  I didn’t post that original piece because I thought some people might misinterpret the 1929 chart and believe that it was fear mongering.  That’s exactly what happened.  And after a bit of controversy followed the original post Tom posted a follow-up which explained the chart in more detail.  It was a very useful explanation that cleared up much of the confusion.  But the confusion has continued today primarily because some other people have picked up on the chart and used it to imply that we could be on the verge of that 40%+ crash.  The thing is, Tom never implied this.  He was simply pointing out that the market pattern was similar.  In other words, the chart below very clearly shows that the potential downside risk to the Dow is about the 14,000 level.  Therefore, the downside risk according to Tom’s analysis is 12.5%.  NOT 40%+.




Anyhow, I personally don’t think this environment resembles 1929 in many ways.  But I work from a more fundamental perspective whereas Tom is an expert in technical analysis.  In addition, I can see how some people might misinterpret the chart and use it with a more malicious intent than Tom intended.  But it should be noted that this was not the original intent of the chart and Tom was simply pointing out that the market action rhymes, but not that it meant there was 40%+ downside risk.  Whether a past technical trend translates into actionable market analysis is obviously something that is highly debatable.  But that’s a different matter.  Anyhow, I hope that clarifies some of the confusion here.


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  1. The chart from 2 months ago did a good job of predicting the last 2 months, even this recent bounce up. The very interesting part is the coming month.

    When different bubbles pop the common human nature behind them can result in similar charts.

    The key similarity is the Fed made lots of new money during the 1920s and has done so again recently. Lots of new money can drive up stock prices, for awhile. It did so then and has done so recently.

    Those who do not learn from history get burned again and again.

  2. There is a chance that this is showing something about human nature and late stage of bubbles.

    It is also possible that this just becomes a self fulfilling prophecy. If enough people on Wall Street believe this chart shows the market is going to crash, then it would crash. The main reason the market has gone up is that people thought it would go up. The economy is not 3 times stronger than when the market was at 666.

  3. The current period is exactly like the end of the roaring 20s, and will resolve in a similar fashion over the next few years.

  4. Cullen –

    the problem is that even in his original post, Tom claimed that the different scale doesn’t invalidate the comparison because “the dance steps are the same”… but he gives zero evidence to show that this is an accurate claim.

    what is the R^2 of the two lines on the chart? my guess is it’s nowhere near significant…

    the mind being fooled into seeing similarities that don’t exist is a very basic cognitive bias…

  5. I subscribed to McClellans work for all of last year and he was consistently wrong. I have also come to the conclusion the fitting graphs or finding analogs is sloppy and lazy technical analysis. While the market be somewhat overvalued, there is no way that I would use analysis like this to make a decision.

  6. One can take any pair of sufficiently random sets of data, scroll across them until you find, after rejiggering the scales appropriately (these two charts would appear not at all similar if they both had a zero starting point for the y-axis), a certain similarity between the two.

    To make comparisons, and worst of all, single-data-point percentage comparisons of these carefully selected snippets of data is arguably fraudulent.

    If the chart had included the percentage decline figures for the 6-month-earlier decline, it would have been obvious that the contemporary decline, even if this only-by-chance similarity persisted into the future, would not be anything close to the 40+% decline shown in the 1929 data.

    Fiddling with the scales on a multivariate chart is one of the classic ways to lie with charts, and every marketeer who presents charts to support their sales pitch (the product is irrelevant, this occurs everywhere) is aware of how to fiddle with the presentation of that data to tell a lie.

  7. Hi Kid,

    I generally agree. I am personally not a big fan of chart overlays and pattern recognition, but that doesn’t mean I am necessarily right. There’s a certain level of truth to the idea that the past rhymes, but doesn’t repeat. I don’t mind using some technical analysis, but as everyone here knows, I am more of a fundamentally focused analyst.

    That said, it’s still worth noting that Tom did not imply what many people think he implied. My interpretation of it is that he merely thought the pattern was similar. Therefore, that could mean there’s 10%+ downside from here. But not 40%.

  8. If I recall correctly, only a handful of stocks were participating late in the 1929 rally. Today, small stocks in the form of the Russell 2000 Index are if anything outperforming the S&P500.

    But for those who like to scare themselves or justify hiding under a cash blanket, you can always find echos in history to serve that purpose. Last September, Robert Prechter’s doom-laden house organ, “The Elliott Wave Theorist,” observed that, in 1929, high-grade bonds had peaked in 1928 and commodities had peaked several years before 1929. Today, we see the same sequence unfolding: high-grade corporate bonds put in a broad top centered on November 2012 and commodities topped out in 2008.

  9. When we see that the progressive movement brought about the stock crash in 29 and the previous agendas of that day like prohibition and todays tobacco prohibition its not hard to find that their plan back at 1900 is in full swing today. Its nearly a carbon copy by design and to see the 29 chart trending precisely with todays…………God help us all!

  10. right. my beef is with the claim “the pattern is similar”… IS IT? that’s the real question…

    i mean, there is no doubt that both lines show upward sloping charts with some dips in them… but my guess is that they are actually not very “similar” at all when we analyze them with, ya know: math…

    I could be wrong… but I haven’t seen anyone actually analyze the underlying data.. R^2, correlation, etc…

  11. as if on cue, Matt Levine tackles the DATA:


    “If you look at the correlation of daily returns between the 1928-1930 Dow and the 2012-2014 Dow is about 11.3 percent. Basically no correlation. The chart looks sort of nice from far away, but if you look at it up close, an up day in 1929 “corresponds” to an up day in 2013 barely more than half the time.”

    which was exactly my point… it’s voodoo…

  12. Isn’t one giant difference between then and now is that back then we were on the gold standard with a Fed that was reluctant to devalue once the crash started? I certainly don’t know all the history, but wasn’t there gold hoarding going on about that time as well (internationally… somehow I have the impression the French in particular were doing this).

  13. Nope not at all!

    Heres a time line starting in 1900,dont be surprised to see the same thing playing out today nearly 100 years later.

    1901: REGULATION: Strong anti-cigarette activity in 43 of the 45 states. “Only Wyoming and Louisiana had paid no attention to the cigarette controversy, while the other forty-three states either already had anti-cigarette laws on the books or were considering new or tougher anti-cigarette laws, or were the scenes of heavy anti- cigarette activity” (Dillow, 1981:10).

    1904: New York: A judge sends a woman is sent to jail for 30 days for smoking in front of her children.

    1904: New York City. A woman is arrested for smoking a cigarette in an automobile. “You can’t do that on Fifth Avenue,” the arresting officer says.

    1907: Business owners are refusing to hire smokers. On August 8, the New York Times writes: “Business … is doing what all the anti-cigarette specialists could not do.”

    1917: SMOKEFREE: Tobacco control laws have fallen, including smoking bans in numerous cities, and the states of Arkansas, Iowa, Idaho and Tennessee.

    1937: hitler institutes laws against smoking.This one you can google.

  14. As we can all see the END GAME is to first ban car smoking and then follow it up with a ban in the homes,likely using the children for this purpose yet again. Then if they can get their final smoking rates at a certain level tobacco control plans on pushing the government for OUT RIGHT PROHIBITION ON TOBACCO PRODUCTS!

    Second Hand/ Third Hand Smoke: Trigger For Outrage –Catalyst For Change?
    •Smoke Free Public Places
    •Smoke Free Work Places
    •Smoke Free Parks/Open Spaces
    •Smoke Free Private Transport
    •Smoke Free Homes
    Positioning Tobacco Endgame In The Post-2015 Development Agenda
    UNSustainable Development Goals Or Expanded Millennium Development Goals

    Can tobacco control endgame analysis learn anything from …


    The thirdhand and second hand smoke MYTHS were created to create public fear and outrage. They are basically telling us that in the above! TRIGGER FOR OUTRAGE!

  15. Who owns CVS Caremark Corporation?


    FMR 63.47M $3.60B as of Sept. 30, 2013

    FMR owns CVS

    CVS CVS Caremark Corporation 0.55 -6.00% 63,470,077 SHARES 56.75 68.77



    CENTRAL INDEX KEY: 0000315066
    IRS NUMBER: 061209781

    SEC ACT: 1934 Act
    SEC FILE NUMBER: 028-00451
    FILM NUMBER: 131217882

    ZIP: 02210
    BUSINESS PHONE: 6175706339

    FMR LLC Company Profile

    FMR is “semper fidelis” (ever faithful) to its core business. The financial services conglomerate, known as Fidelity Investments, is one of the world’s largest mutual fund firms. It serves more than 20 million individual and institutional clients, as well as 5,000-plus financial intermediary firms. Fidelity manages nearly 500 funds, boasting some $4.2 trillion in assets under administration, including managed assets of $1.8 trillion. The founding Johnson family controls Fidelity; Abigail Johnson, CEO Ned Johnson’s daughter and one of America’s wealthiest women, is its largest single shareholder.


    They bought the biggest shares in CVS they don’t own it wholly but have the controlling interest and likely the stock proxys from several other share holders.

    The other biggest shareholders are the banksters on wall street that were bailed out. No doubt trickle down FED money bought up much of CVS at the direct orders of the whitehouse thru the connections of RWJF!

  16. RWJF Applauds CVS Decision to End Tobacco Sales

    Risa Lavizzo-Mourey, MD, RWJF president and CEO, praises the move by CVS Caremark, and hopes the decision will prompt other pharmacies, large and small, to take similar action.


    Tobacco Control

    RWJF Applauds CVS Decision to End Tobacco Sales


    CVS to Stop Selling Tobacco Products

    CVS Caremark announced it will end the sale of all tobacco products at its more than 7,600 stores throughout the United States.

    Risa Lavizzo-Mourey, MD, RWJF president and CEO, praises the move by CVS, and hopes the decision will prompt other pharmacies, large and small, to take similar action. At no other U.S. health care setting are tobacco products sold in the same location where patients are diagnosed and treated—pharmacies should no longer be that exception.


  17. ROBERT WOODS JOHNSON FOUNDATION is Johnson and Johnson their philanthropic arm who started and financed the smoking bans nation wide and created tobacco free kids………… Rockefellor from the last round of prohibition created the ACS,ALA,AHA to carry on the prohibition movement. While RWJF gave them a 99 ,illion dollar grant in 1993 to go out and create junk scienc eand lobby for smoking bans at the state and local levels.

  18. So you’re saying smoking regulations lead to economic collapse and … Hitler? Hmmm, yes, it all makes sense now. Thanks.

  19. The reason he get’s a 97% correlation for the Pearson correlation test is because of how the math works. A Pearson correlation tells you if the fluctuations in each time series, after subtracting the mean and dividing by the standard deviation for each series, have similar magnitudes and signs (for r =1) or similar magnitudes and opposite signs (for r = -1).

    Similarly, daily returns are of limited usefulness. (They are useful if your trading on a daily or shorter time frame).

    One way to look at this is you want the correlations between the slopes of the two data series as a function of window length. The figure he presents with the DJIA correctly normalized to 1 at the starting point is the window of length = data series length. The current DJIA is up about 25% over that time window, the 29 DJIA about 100%. At that point you can pretty much dismiss this whole thing as junk.

  20. Yeah… it’s like eerie the similarities. AND Uranus takes 84 and some change years to return to the EXACT place it was before– Oh man!!! 1929 + 84=… oH MAN WE ARE DOOMED!!! I Was looking at corn prices from the 1200’s and its the SAME!!! CRAP!!! SELL SELL SELL!!!

  21. Vincent, I thought you agreed with Milton Friedman and Anna Schwartz on their analysis of the GD. I haven’t read it myself, but you tell me: did they blame the Fed for making lots of new money during the 1920s? I thought their overall take was that the crash in 1929 could have just been a minor affair: it only turned into a long depression because the Fed wasn’t aggressive enough in devaluing the dollar. Isn’t that kind of the opposite of what you’re saying here?

  22. Maybe you’re looking at it the wrong way: perhaps when the market was at 666, it definitely was not three just 1/3 as “strong” as where it is now.

  23. Milton Friedman was not an advocate of the Austrian Business Cycle Theory. He was more like Krugman and thought that printing money was a good thing most of the time.

  24. The stock bubble is the same and we are in danger of deflation of stock prices. The Fed is not the same. They have been averaging around $1 trillion in new money per year. We are in no danger of paper money becoming more valuable.

  25. But it was money losing it’s value that caused the real damage. At least I think that’s a pretty common interpretation: whether you agree with Friedman & Schwartz or with the debt deflation concept of Irving Fisher. Perhaps ABCT isn’t on board with that though.

    BTW, I left at least one small paragraph you might find interesting on your own site, in the thread regarding Say’s Law. I’ll repeat it here (to highlight it).

    It seems to me that you are proposing that outlawing FRB and going back on the gold standard at a fixed rate (e.g. MOA = gold, UOA = $1 = 1 oz), where the CB can only issue script by purchasing gold at the UOA rate, … that these two steps will remove any significant volatility in the value (not price… price is fixed) of gold. Is that correct? Also, I’m wondering if you think this would require worldwide cooperation (i.e. most govs and CBs doing the same thing), or would it be enough for a single country to do it? If I’m correct (especially for the volatility part) what is your evidence that this would work? … or do you just believe it would work for theoretical reasons?

  26. Correction to 1st sentence: I mean money gaining in value (against all other goods) that caused the real damange.

  27. Chart overlays and much technical analysis are the astrology of Wall Street. That being said, by March 31 we’ll know if the market winds up in Uranus. After the intraday low of S&P 666 during the crash (lots of superstitious traders must have picked the same stop?) I guess even the occult will have its day in the casino.

  28. Well this puts a new twist to the debate, it has specifically nothing to do with the subject but everything to do with it and includes one thing that wasn’t present in 1929 that could magnify the issue.


    Below is a chart of a mini overnight flash crash in the S&P 500 futures. The entire price action happened over a matter of minutes back in 2008. Is it just me or do you feel like this pattern/behavior is becoming an archetype for our algo-driven markets? Change the scale and tighten range and prints depending on liquidity and this price action can be found in every market on any given day. Run em higher to push them down only to bid them back up.


    stolen from dynamic hedge

  29. I always find it puzzling when anyone defends smoking and drinking. The health effect of those those (plus obesity) accounts for around 80% of all health care costs, not to mention the drain on personal finances to buy the stuff.

    Three guys were in my house for the last three days doing an emergency repair. They probably could have done the work in half the time if they did not take a smoke break every half hour. I wonder how they billed the landlord.

  30. And I say again, we are in no danger of money becoming more valuable against all other goods, since they have the printing press running at high speed.

  31. But as to my other point: are you suggesting that adopting your changes (regarding the Fed, FRB, and the gold standard) will remove all significant volatility from gold, thus giving us a nice stable MOA?

  32. If when the USA was founded they required banks to sell 10 year bonds to get cash to loan out for 10 years (so banks could not make new money) and never went off a gold/silver coin money (no paper money or central bank) that there would not have been anywhere near the number of inflations/booms/busts/deflations/crisis between then and now. If regular banks and central banks can make and destroy money then the money supply is not stable and you get crisis after crisis.

  33. Vincent, a few points:

    1. re: “never went off a gold/silver coin money”… was that really the universal standard back when the USA was founded?… I thought parts of the US were essentially on the “tobacco” standard back then.

    2. As with the “tobacco” standard, the gold/silver coin standard never escaped being subjected to devaluation either: people would regularly clip/shave coins and even various coin issuing govs throughout history were notorious for mixing in cheaper metals (debasement)… in fact it was probably a smart move for those states… and the coin clippers probably helped too! Gresham’s Law (written in the 16th century I think) described how the debased coins actually ended up taking on the important role of the MOE.

    3. Why do I think coin shavers/clippers and coin debasing gov’s probably (unintentionally?) helped the economy?… because without a bit of flexibility, gold probably was never an ideal MOA.

  34. So are you saying that in order to avoid certain catastrophe, all we need to do is travel back in time to the founding of the US, make sure we stick with gold and silver coins, require banks to do that thing with bonds you like, never have a central bank, and never use paper money. Whew! Good to know a ready solution is at hand! :D