THIS MARKET SET UP LOOKS LIKE THE CRASH OF 1929 / MARKETWATCH

This Market Setup Looks Like the Crash of 1929

by Ben Rand

Wednesday, February 12, 2014

There's a remarkable chart flooding Wall Street inboxes this morning. 

Here it is:

Click to enlarge

Check out the parallels between the market in 1929 and today. After a sustained rally in 1928, the Dow sold off to its 200 day moving average and then bounced strongly. After the market dragged everybody in on the bounce, it collapsed in the next few weeks giving back all of 1928's gains. 

However, the more this chart is circulated, the less likely a crash actually occurs. Simply because the market exists to confuse the masses. When investors are prepared for something to occur, it very rarely happens. 

To understand this you must answer this question- What's the common narrative? 

If you asked a group of investors why the market is up, the overwhelming response would sound something like: "The market is up because the Fed has been orchestrating round after round of Quantitative Easing. Without the Fed intervention the market would not have rallied 150% off the lows."

Ok, so if the average investor believes the market is only up because of the Fed, they also believe that once the Fed exits QE, the market must go down. 

If this is now the common narrative - that a Fed exit will cause an elevator drop like we saw in 1928 - the odds of this actually happening are quite slim. 

Now why is this the case? Because the market only exists to confound the average investors' expectations. If the market always satisfied the average investors' expectations (the common narrative), we'd all be hedge fund billionaires. But since none of us are George Soros, chances are - what we think will happen with the market is usually wrong. 

In order to have a dramatic sell off (which happens very rarely), the market must confuse and surprise a large majority of investors. If charts like the one referenced above are floating around, then the element of surprise has all but been taken out of the equation, and exiting QE will cause a market rally, not selloff. 

All the best, 

Ben Rand