This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
Barry Ritholtz from The Big Picture recently posted a chart of three prior stock market crashes in the S&P compared with our current market environment. There were some comments about the charts not being to any kind of scale to each other. I wanted to analyze a bit more. Of course this is all moot, thanks to the Beard Power unleashed last week, but indulge my study for the pure academia ;)
Unfortunately, being the cheapskate I am, I didn’t have access to free data for the S&P past 1950. So I took historical data for the Dow Jones Industrial Average from Yahoo Finance instead. I tried to isolate the data that was used in the Big Picture post. My charts of the Dow are above the charts Barry posted of the S&P:
Source: Bronson Capital Markets and http://bigpicture.typepad.com/
As you can see, I think I match the time periods in question pretty well. I then plotted them all on the same chart on a basis of percent correction from the peak vs. trading days after the peak:
To non-dimensionalize the time factor, I plotted the data against a ratio of start-to-finish time. For 2007, I assumed that if the current correction is indeed a crash it will follow the 1961 and 1987 time ratios fairly well:
The data from the 1929 crash really went on for a long time compared to the other crashes. When you isolate it to the first trading year after the peak, and ignore the protracted bear market through 1933, you get a more congruent picture:
Still, the data is not similar in that the 1929 data contains a large rally before the ultimate resumption of the killer bear market. I decided to truncate the 1929 data after the first higher low (at 79 trading days or 12/23/1929) as the 1961 and 1987 datasets seem to have been truncated. This would mark the end of the crash and the beginning of a new upward trend phase. The curves then collapse in a very satisfactory way:
Should this time prove to be a true crash, we can expect (according to historical average) to hit around a 70% decline from Dow 14,000 putting us near Dow 9,800. To stay on target for a similar timeframe, it would have to come sometime in the first two weeks of February. We’ll see if it all pans out and my assumptions are correct. It should be an interesting few weeks either way!
This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com
January 25th, 2008 at 10:44 pm
Very interesting. It’s a long way to 9,800, so that would be some incredible action.
January 26th, 2008 at 1:58 am
why didn’t he include 2001 bear??
January 26th, 2008 at 2:07 am
Wow that is interesting… it seems like the average is like every 25-26 we have a market crash its only been
20 since the 87 crash, but all the signs are there.. the economy is slowing down.. theres the housing problems
and unemployment is very high, not to mention the falling dollar… could be some profitable short
selling if your right… either way I dont see the economy having a bounce anytime soon, seems more likely it
will fall and then consolidate for months before climbing again. Should be interesting to see how it plays out.
January 26th, 2008 at 5:19 am
welcome back!
January 26th, 2008 at 6:11 am
What’s your assessment of the four-year period BEFORE each date?
January 26th, 2008 at 8:28 am
I’m not used to this kind of quality at MtM. What happened to talking about pimps and ho’s?
January 26th, 2008 at 9:21 am
michael: if the dow hits 9800 in a couple of weeks, that will be great for pimps and hos…in times of crisis, americans turn to their vices…ok, now back to the quality content provided by prospectus :-)
January 26th, 2008 at 11:41 pm
[...] my prior post called “The Worst It’s Ever Been?“, I compared the current market environment with three prior market crashes (1929, 1961, and [...]