“History doesn’t repeat itself – at best it sometimes rhymes” that quote is from Mark Twain. Too many times market participants are looking for history to repeat. Because the human decision making process is the only constant (and the algorithmic trading is included, because they are programmed by humans) in the market, certain patterns to tend to repeat, and being aware of those patterns can give us an edge because they can help us manage expectations. We do not want to look at previous patterns as specific GPS coordinates which can pinpoint exactly where the market will go, they are more like smoke signals which can, and often do, become distorted by changing conditions.
Countless blog posts have been written which compare our current market conditions to 1929-1933, I put together a series of charts for THIS POST in October 2008. It was never my intent to lead readers to believe the market would repeat that scenario, I just wanted to show how vicious bear market rallies can develop in the context of a larger bear market. It was a way of saying that we have to be prepared for anything.
It is still possible that the market will trade similar to the 29-33 period, but a study from LARRY MCMILLAN indicates (paraphrasing by me) “study showed an 89% correlation between 1938 and 2009” You can read the Barron’s article by STEVEN SEARS HERE I have high regard for Larry and the work he does so it piqued my curiosity to compare the charts of the Dow Jones Industrials in 1938 and today. The chart is below.
Another often quoted saying comes from George Santayana, “Those who cannot remember the past are condemned to repeat it.” As a techincian I look at the conflicting information from these periods vs today and realize that if you look at enough charts you can usually make a case for just about whatever you want with a chart, but that is not the objective analysis that has served me well as a trader. No one knows what will happen in the future, but if we are prepared for all potential outcomes we will never be surprised and we will then be able to make our decisions on objective analysis rather than emotion. An unemotional plan allows us to prepare for all scenarios and when our primary thesis is proven wrong, that is what a backup plan (cutting losses) is meant for.
So if we want to, we can look at either of the charts above to create or justify a scenario that we want to believe, but the market will do whatever it wants to do which is why our plans have to be flexible. There is no roadmap for the markets, but if we understand what the possible scenarios are and then manage risk, we can achieve greater gains than those who hold stubbornly to their belief about what the market “should do”.
By the way, as bullish as the market was in 1938, look at the chart above to see the price deterioration over the next 3 1/2 years as the market made a lower low.