There have been many comparisons between current market action and the great depression of the 1930s, and in many ways these comparisons are valid. The last time markets were as choppy as they are today was indeed the 1930s. The world is a very different place to how it was 70-80 years ago, but the current extremes were seeing point back to this period as being a strong likeness. According to Rob Hannah of Quantifiable Edges, the stock market only recovered from this decade long malaise, once it switched from chop mode to trending mode. If a long period of chop is the worst we experience over the next few months, even years, although frustrating, there may be worse things that could happen. Ironically, a smooth decline which bottoms out to form a smooth rally may be the real harbinger of a recovery. This may be a moot point as we are still far from seeing smooth rallies or smooth declines.

Potentially more positive signs were pointed out by Jason Goepfert of SentimentTrader, who noted that until this week the S&P 500 has never swung up 5% one day then 4% down the next. This has happened three times on the Dow Jones, all dates between 1929 and 1932. None of them marked a low, but were within a week or so of one. Barry Rithholtz also noted that market bottoms are rarely completed without multiple retests of prior lows. This is arguably what we were seeing last week. While there is considerable risk of further selling, at least with fixed odds trading our risk is limited to our stake. Therefore a Bull bet, which predicts that the market will be higher than a certain level in the future could offer an attractive risk reward. My suggested trade this week is therefore a bull bet predicting that the Dow Jones (Wall Street) will be higher than 9000 in 9 days time could return 187.

Leave a Reply