Are we headed for a crash?
It’s important to keep an open mind to different opinions. I read and listen to some of the craziest stuff out there about the markets and the economy. The latest buzz is about a chart published by newsletter writer Tom McClellan. He thinks we’ll have a 1929-like crash.
Why does he think that? His Dow price charts, comparing 1929 to the end of 2013, look eerily similar. Will the market pop?
ALWAYS A CORRECTION OR BEAR
I try to keep things simple. The broad market (S&P 500) has been up for five years straight. Plus, in 2013, we had 52 new, historic highs. We’re bound to have a down year soon. Or a correction. That doesn’t require a chart to figure out.
Besides that, the market, even in the strongest of bulls, is usually down more than it’s up. We’re either entering a correction, or bear market, or just leaving one. The market is down more days per year than it is up.
Does that mean we should flee stocks. If you’ve read my last article and you’ve prepared, then you can weather a drop in equities. Remember, a drop in the markets lets you buy at sale prices.
If, on the other hand, you’re heavily concentrated (read: dangerously misallocated) then you may want to re-think your market exposure.
TECHNICAL VERSUS FUNDAMENTAL
Mr. McClellan’s chart is an example of technical analysis. He looks at price levels, trading volume and dozens of other patterns. Technicals can be useful but aren’t a replacement for research.
Fundamental analysis is at the opposite end of technical analysis. The famous and wealthy Warren Buffett would be considered a fundamental investor. He has the results to prove which approach is more successful.
IS THIS TIME DIFFERENT?
The market crash in 1929 was supported by fundamentals. There was a large bubble happening. More importantly, the GNP (gross national product) dropped by 32 percent. Our economy shrank by a third! The market should have dropped.
During The Great Recession our GDP shrank by 2 percent. The market responded by dropping in half. There wasn’t any technical reason for the drop. Our economy shrank and the market shrank. It dropped a little too much for such a small drop in GDP, but nonetheless, there was an actual reason.
I do use some limited, technical indicators but I don’t expect results like Warren. Technicals ignore the big picture: the economy, corporate profits and demographics.