GZ, i have been aware of the Dowguru site for some time now...and he made a striking prediction in '97 about the likely path the Dow would take in '98 based on comparisons with the market of the 1920's. this prediction did in fact come true...a sharp fall followed by a recovery and a climb to new highs. by applying an approximate ratio of 40:1 to the '28 Dow he worked out where the highs and lows of the Dow in '98 should approximately lie. i don't know how he figured out that the chart patterns would repeat themselves in this manner, but fractal geometry and Elliot wave theory are both based on pattern repetitions which seem to be a part of the order of nature.
i have closely examined the chart of '87 after the crash, and like others have noticed that it too was a repetition of the '29 pattern, the correlation was in fact remarkable.
for other views of these patterns look at
futuresfax.com
which among other things has also comparisons of the '87 and '99 bond markets in relation to equities.
another site that looks at the chart patterns of various markets in '87 is this one:
arts.unimelb.edu.au
what is alarming about the '87 charts specifically is that they show many of the inter-market relations that have become strained now, were strained back then as well. this is not to say that we will indeed have a repeat performance, i.e. a crash...that is something that is virtually impossible to predict since it is such a rare event. but imo one should at the very least prepare for the possibility of a sizeable correction at some point if the inter-market strains do not abate. in other words, bonds, oil, gold and the dollar should be watched closely for signs of further deterioration.
similar to '87, the current account and trade deficits are currently exploding. the first half of '99, just as the first half of '87, was characterized by massive inflows of foreign funds into U.S. equities. if anything should cause this flow of funds to reverse, a dramatic decline in stock prices would not be out of the question.
we are all familiar(since it is an experience of the most recent past) how prices of certain stocks can soar to incredible heights in a buying panic...no-one can really argue that the blow-offs made in the mania stocks were in any way rational. the same irrationality takes hold in a selling panic, which is why one can never really rule out that one will occur. i repeat that this is not meant to predict imminent disaster - but a massive shift of assets from stocks to bonds for instance is certainly possible should bond yields climb furhter. what is not known of course is where the cut-off point for such an asset shift currently lies, but clearly the stock market exhibits a degree of nervousness, as money concentrates in fewer and fewer issues.
whatever one's view on the future course of the market, it can not be denied that several red flags have been raised of late, so this is probably a good time to exercise some caution...
regards,
hb |
