6 ms·

Scary 1929 market chart gains traction

27 points by andv 13y ago

wcgortel 13y ago
FYI, with charts like this it's kind of important to do some quantitative work, not just take a look. Check out this taxonomy of charts: http://blogs.cfainstitute.org/investor/2013/05/15/an-r-squared-chart-taxonomy-seeing-is-not-believing/ http://blogs.cfainstitute.org/investor/2013/05/15/an-r-squar...
- samolang 13y ago
  Apparently as of a couple weeks ago the R-squared value was ~90%. http://www.marketwatch.com/story/ghost-of-1929-haunts-as-1997-style-crisis-hits-2014-01-29 http://www.marketwatch.com/story/ghost-of-1929-haunts-as-199...
  - GFK_of_xmaspast 13y ago
    I would want to see what happens to r2 when you drag the 1929 data across the last 80 years of the DJIA or whatever other index you want before I get excited about a 0.9 result.
drcode 13y ago
Yeah, patterns like this are much easier to find than you'd think and don't have any predictive value. Yes, the market could take a dive (or shoot upwards) any time, but not because of the pattern in this chart.
- officialjunk 13y ago
  i HATE "news" like this. we know it's not correlated, but it's scary how the media can essentially manipulate the market. hope this doesn't get covered by more popular news outlets.
- dllthomas 13y ago
  It would be because of the pattern in this chart IFF it spooked enough people. Unlikely. It could be because of the same things as caused it in 1929 - the pattern in the chart is (extremely weak) evidence of similarities, and so we probably should up our estimates of that likelihood by some epsilon - but (without rigorous analysis) the appropriate epsilon is probably small enough that it's below the precision available to human reasoning. Ignore it or investigate further, don't do anything based on this.
redblacktree 13y ago
Folks smarter than me: is it prudent to move my assets into cash for a couple of months? Is there really anything to this?
- davidw 13y ago
  The basic strategy that I've always seen outlined: put a bit each month into an index fund. If the market tanks, that means you are buying low!
  - sukaka 13y ago
    it's even simpler and effective to be buying only at ema crossovers!
  - themoonbus 13y ago
    This is exactly the correct strategy.
- jamesaguilar 13y ago
  For all times t, there is a chart that makes it look like the market will tank at t+1.
- justanother 13y ago
  I've been a doomsayer ever since the 2008 crisis (crises) exposed certain systemic flaws in finance and investing, and I've also been wrong while everyone else fed at the QE trough and did just fine. While I don't believe that QE regimes and cooked statistics will necessarily end well, I also don't believe this chart proves anything. If you do, however, look into ultra-shorts like SDS and DXD, and if you happen to be correct, you can profit handsomely from such an elevator-shaft drop.
- lutusp 13y ago
  > Folks smarter than me: is it prudent to move my assets into cash for a couple of months? No, bad idea. Don't make moves based on press articles like this -- they're either created by people who want to exploit your reaction, or they're followed by contrarians with no connection to the article, who do the opposite of what the article suggests, and thereby also exploit your reaction. http://en.wikipedia.org/wiki/Contrarian_investing http://en.wikipedia.org/wiki/Contrarian_investing My advice -- invest long-term in market index funds, and pay no attention to market advice. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths
mcphage 13y ago
I think that if this chart does have predictive power, the implications are far stronger and weirder than just "the stock market is going to drop next month". If there is a match to these random ups and downs, then why? What does each of them signify? Luckily, it has no such predictive power.
jdeisenberg 13y ago
The y-axis tells the story. In 1928-29, the market lost about 45% of its value (375 down to 200). If the pattern holds, the current market will go from about 16400 to 12400, which is 25% of its value. That's still bad, but not as bad as 1928-1929.
ap22213 13y ago
Someone told me that part of the reason for the great returns of the stock market in 2013 was because of the fed's quantitative easing program. They said that the easing was increasing the money supply, and that money has no where else to go except into the stock market, because all other investments haven't had great returns. Is there any merit to that? I was planning to keep investing in stocks because of that. But, really I know nothing.
- pyrrhotech 13y ago
  Yes that's largely the reason
- swalsh 13y ago
  Warren Buffet has only a few basic rules. Amongst them is only invest in things you understand. I think as a general rule, its a pretty good one.
  - ap22213 13y ago
    Unfortunately, I don't understand much. So, I just invest in S&P500.
    - enoch_r 13y ago
      By doing so, you'll beat the post-fee, ex ante performance of actively managed mutual funds[0]. You're doing exactly the right thing--investing in broad-based indices rather than trying to beat the market. As your time horizons get shorter, you can move some money to bonds (treasuries, bond ETFs, etc.) to decrease your risk (and reward). [0] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021
    - pyrrhotech 13y ago
      much better than investing with a some wall street fund that charges exorbitant fees to lag the market
deleted 13y ago
[deleted]
lutusp 13y ago
This sort of scare tactic means nothing without an effort to explain the correlation. Without a testable theory, it's meaningless data mining. My guess is someone on the inside has already shorted the market just before press time, anticipating the effect the article will have among unsophisticated investors. And guess what, boys and girls? That kind of "insider trading" is legal -- you can say anything you want in the press, and you can position yourself to benefit from your own article in advance. It's all perfectly legal.
- enoch_r 13y ago
  Shorting the S&P500 in the hopes that a MarketWatch article will have a significant effect on the price despite the $14T market cap and high liquidity would be an absurdly risky and low-return way to make money. That's why people who run these sorts of scams focus on penny stocks with low market caps, relatively unsophisticated investors, and low liquidity. Not that I disagree that the article is meaningless data mining--I just think stupidity is a better explanation than conspiracy. Edit: I should have used the DJIA instead of the S&P500, since that's what's referenced in the article, but the same points hold.
  - lutusp 13y ago
    > I just think stupidity is a better explanation than conspiracy. That possibility must always be given its due weight. :)
theklub 13y ago
I've seen that same chart applied to crypto currencies lately, seeing this now just make me laugh.
hcarvalhoalves 13y ago
Self-fulfilling prophecy?
edabobojr 13y ago
I'm pretty skeptical of charts like this. On the y axis, the scales aren't relative. The gain on the black line before the drop is about 187% (200 - 375). The gain on the red line is 132% (12400 - 16400). On the x axis, there isn't even a label for red so it impossible to tell how the different time periods compare.
hartator 13y ago
If you look hard enough, you will always find correlation between stuff. Never forget that's correlation doesn't imply causality!
- dllthomas 13y ago
  Correlation does imply causality, but: 1) it doesn't (alone) tell you what sort 2) it takes quite a number of examples to be very certain of anything 3) you have to be weighting counter-examples correctly, too 4) you shouldn't forget your priors
jostmey 13y ago
If you look hard enough in a large enough data-set you will eventually find a correlation. It is just like the experiment where a dead fish placed in an MRI machine was asked to identify the emotional state of a person in a picture. Guess what happened. http://blogs.discovermagazine.com/neuroskeptic/2009/09/16/fmri-gets-slap-in-the-face-with-a-dead-fish/#.UvpXTVJdWbV http://blogs.discovermagazine.com/neuroskeptic/2009/09/16/fm...
grandalf 13y ago
This is very similar to the shape of the google trends graph of "fettucini".
api 13y ago
I am not particularly a gold bug or even a fan of this site, but I have found this chart interesting for a long time: http://pricedingold.com/charts/DJIA-1900.pdf http://pricedingold.com/charts/DJIA-1900.pdf The pattern is fairly well established at this point. I am not sure exactly what it means and I'm not sure the obvious interpretations that most people would have are correct, but it definitely argues for some sort of pulsing macro business cycle. My own hypothesis is that gold's value vs. paper/stocks is a decent indicator of "fear" -- people flock to commodities like gold, silver, and real estate, as well as to bonds, etc. when they don't believe the market is sound. Thus gold's value rises during these times relative to paper currency, which depresses the value of the stock market when priced in gold. During times of hope/exuberance, the opposite occurs. People flee static investments for dynamic ones. Who wants to own a lump of metal when the markets are hot? There hasn't been a really big macroeconomic "growth story" since 1999, thus this graph. If the pattern continues, this graph argues the same thing. Given that this is a repeating and established pattern, it's a much stronger argument than the correlation in the original article up top. It argues that we have not yet "hit bottom" in the current macro cycle and that one more crash of some sort lies in the near future before the economy resets itself for the next growth cycle. (Argues, but does not prove, of course.)
- lutusp 13y ago
  > but it definitely argues for some sort of pulsing macro business cycle. Not really. Without an explanation, it's three bumps having no significance. If you watched a sequence of coin toss outcomes, some heads, some tails, and called the heads outcomes "market surges", you would see the same kind of pattern, but without any real meaning. Remember that to a scientist, the default assumption is not that an observed pattern has significance, but that it doesn't -- it's called the "null hypothesis". There's a world of difference between describing a pattern, and explaining a pattern. More here: http://arachnoid.com/randomness http://arachnoid.com/randomness
  - api 13y ago
    Don't repeating patterns increase the likelihood that the pattern is non-random with each repetition? If you saw a graph of coin flips that showed a clear sinusoidal pattern and that pattern continued over many cycles, wouldn't it be reasonable to at least suspect that the coin was not "fair"? One cycle, maybe not. Two, okay, I'm slightly suspicious. Three, four, five? Of course the pattern says nothing about causation, just that something is biasing the output somehow. I am not a statistician but I do have a fair amount of background in things like information theory, and I find it very hard to believe that regularity has zero significance. Plug that output into Shannon's equations and compare it with a random source. Or doing VBR mp3 compression on /dev/urandom vs. a piece of music. The fooled by randomness argument can be taken too far. In a reductio ad absurdium you could argue that I do not exist because theoretically a random source could produce what I just typed. You would theoretically be correct. If you output digits of pi long enough, they will contain this text.
mcguire 13y ago
Crestmont Research Stock Matrix: http://www.crestmontresearch.com/docs/Stock-Matrix-Taxpayer-Real1-11x17.pdf http://www.crestmontresearch.com/docs/Stock-Matrix-Taxpayer-... Key and other versions: http://www.crestmontresearch.com/stock-matrix-options/ http://www.crestmontresearch.com/stock-matrix-options/ 113 years of stock market returns, adjusted for taxes, inflation, transaction costs, etc. Plus extra bonus history.
ergoproxy 13y ago
Bear Stearns failed mid-March 2008. Despite this, on March 27, 2008 Mark Hulbert gave serious weight to Richard Band's prediction of an "uptrend that could carry the blue chip indexes to all-time highs by late 2008 or early 2009. Dow 16,000 here we come!" http://www.marketwatch.com/story/dow-heading-for-16000-richard-band-says http://www.marketwatch.com/story/dow-heading-for-16000-richa... And on April 18, 2008, Hulbert said "The Dow Theory appears poised to go on a buy signal..." http://www.marketwatch.com/story/dow-theory-poised-to-trigger-a-buy-signal http://www.marketwatch.com/story/dow-theory-poised-to-trigge... Following this advice, you would have bought near the top of the market, when what you really want to do is buy low and sell high... Hulbert is probably the most knowledgeable student of DOW history. He knows that what happens to the DOW in the short run is mostly meaningless noise. He should take his own advice: "Some psychological researchers, for example, have presented series of random numbers to human subjects and then asked them whether there are any patterns in the data. Overwhelmingly, the subjects claim to have detected patterns in the data. "We should keep this research in mind as we watch the stock market day in and day out. We may think we have detected a pattern, but that doesn't mean that it really exists." Quoted from: Market Watch (April 3, 2007) http://www.marketwatch.com/story/dont-read-too-much-into-stock-markets-first-quarter-results http://www.marketwatch.com/story/dont-read-too-much-into-sto...
dllthomas 13y ago
The big question to my mind is how many other points there have been between then and now where this chart would have fit at least as well.

27 points by andv 13y ago

FYI, with charts like this it's kind of important to do some quantitative work, not just take a look. Check out this taxonomy of charts: http://blogs.cfainstitute.org/investor/2013/05/15/an-r-squared-chart-taxonomy-seeing-is-not-believing/ http://blogs.cfainstitute.org/investor/2013/05/15/an-r-squar...

samolang 13y ago
Apparently as of a couple weeks ago the R-squared value was ~90%. http://www.marketwatch.com/story/ghost-of-1929-haunts-as-1997-style-crisis-hits-2014-01-29 http://www.marketwatch.com/story/ghost-of-1929-haunts-as-199...
- GFK_of_xmaspast 13y ago
  I would want to see what happens to r2 when you drag the 1929 data across the last 80 years of the DJIA or whatever other index you want before I get excited about a 0.9 result.

drcode 13y ago

Yeah, patterns like this are much easier to find than you'd think and don't have any predictive value. Yes, the market could take a dive (or shoot upwards) any time, but not because of the pattern in this chart.

officialjunk 13y ago
i HATE "news" like this. we know it's not correlated, but it's scary how the media can essentially manipulate the market. hope this doesn't get covered by more popular news outlets.
dllthomas 13y ago
It would be because of the pattern in this chart IFF it spooked enough people. Unlikely. It could be because of the same things as caused it in 1929 - the pattern in the chart is (extremely weak) evidence of similarities, and so we probably should up our estimates of that likelihood by some epsilon - but (without rigorous analysis) the appropriate epsilon is probably small enough that it's below the precision available to human reasoning. Ignore it or investigate further, don't do anything based on this.

redblacktree 13y ago

Folks smarter than me: is it prudent to move my assets into cash for a couple of months? Is there really anything to this?

davidw 13y ago
The basic strategy that I've always seen outlined: put a bit each month into an index fund. If the market tanks, that means you are buying low!
- sukaka 13y ago
  it's even simpler and effective to be buying only at ema crossovers!
- themoonbus 13y ago
  This is exactly the correct strategy.
jamesaguilar 13y ago
For all times t, there is a chart that makes it look like the market will tank at t+1.
justanother 13y ago
I've been a doomsayer ever since the 2008 crisis (crises) exposed certain systemic flaws in finance and investing, and I've also been wrong while everyone else fed at the QE trough and did just fine. While I don't believe that QE regimes and cooked statistics will necessarily end well, I also don't believe this chart proves anything. If you do, however, look into ultra-shorts like SDS and DXD, and if you happen to be correct, you can profit handsomely from such an elevator-shaft drop.
lutusp 13y ago
> Folks smarter than me: is it prudent to move my assets into cash for a couple of months? No, bad idea. Don't make moves based on press articles like this -- they're either created by people who want to exploit your reaction, or they're followed by contrarians with no connection to the article, who do the opposite of what the article suggests, and thereby also exploit your reaction. http://en.wikipedia.org/wiki/Contrarian_investing http://en.wikipedia.org/wiki/Contrarian_investing My advice -- invest long-term in market index funds, and pay no attention to market advice. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths

mcphage 13y ago

I think that if this chart does have predictive power, the implications are far stronger and weirder than just "the stock market is going to drop next month". If there is a match to these random ups and downs, then why? What does each of them signify? Luckily, it has no such predictive power.

jdeisenberg 13y ago

The y-axis tells the story. In 1928-29, the market lost about 45% of its value (375 down to 200). If the pattern holds, the current market will go from about 16400 to 12400, which is 25% of its value. That's still bad, but not as bad as 1928-1929.

ap22213 13y ago

Someone told me that part of the reason for the great returns of the stock market in 2013 was because of the fed's quantitative easing program. They said that the easing was increasing the money supply, and that money has no where else to go except into the stock market, because all other investments haven't had great returns. Is there any merit to that? I was planning to keep investing in stocks because of that. But, really I know nothing.

pyrrhotech 13y ago
Yes that's largely the reason
swalsh 13y ago
Warren Buffet has only a few basic rules. Amongst them is only invest in things you understand. I think as a general rule, its a pretty good one.
- ap22213 13y ago
  Unfortunately, I don't understand much. So, I just invest in S&P500.
  - enoch_r 13y ago
    By doing so, you'll beat the post-fee, ex ante performance of actively managed mutual funds[0]. You're doing exactly the right thing--investing in broad-based indices rather than trying to beat the market. As your time horizons get shorter, you can move some money to bonds (treasuries, bond ETFs, etc.) to decrease your risk (and reward). [0] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021
  - pyrrhotech 13y ago
    much better than investing with a some wall street fund that charges exorbitant fees to lag the market

deleted 13y ago

[deleted]

lutusp 13y ago

This sort of scare tactic means nothing without an effort to explain the correlation. Without a testable theory, it's meaningless data mining. My guess is someone on the inside has already shorted the market just before press time, anticipating the effect the article will have among unsophisticated investors. And guess what, boys and girls? That kind of "insider trading" is legal -- you can say anything you want in the press, and you can position yourself to benefit from your own article in advance. It's all perfectly legal.

enoch_r 13y ago
Shorting the S&P500 in the hopes that a MarketWatch article will have a significant effect on the price despite the $14T market cap and high liquidity would be an absurdly risky and low-return way to make money. That's why people who run these sorts of scams focus on penny stocks with low market caps, relatively unsophisticated investors, and low liquidity. Not that I disagree that the article is meaningless data mining--I just think stupidity is a better explanation than conspiracy. Edit: I should have used the DJIA instead of the S&P500, since that's what's referenced in the article, but the same points hold.
- lutusp 13y ago
  > I just think stupidity is a better explanation than conspiracy. That possibility must always be given its due weight. :)

theklub 13y ago

I've seen that same chart applied to crypto currencies lately, seeing this now just make me laugh.

hcarvalhoalves 13y ago

Self-fulfilling prophecy?

edabobojr 13y ago

I'm pretty skeptical of charts like this. On the y axis, the scales aren't relative. The gain on the black line before the drop is about 187% (200 - 375). The gain on the red line is 132% (12400 - 16400). On the x axis, there isn't even a label for red so it impossible to tell how the different time periods compare.

hartator 13y ago

If you look hard enough, you will always find correlation between stuff. Never forget that's correlation doesn't imply causality!

dllthomas 13y ago
Correlation does imply causality, but: 1) it doesn't (alone) tell you what sort 2) it takes quite a number of examples to be very certain of anything 3) you have to be weighting counter-examples correctly, too 4) you shouldn't forget your priors

jostmey 13y ago

If you look hard enough in a large enough data-set you will eventually find a correlation. It is just like the experiment where a dead fish placed in an MRI machine was asked to identify the emotional state of a person in a picture. Guess what happened. http://blogs.discovermagazine.com/neuroskeptic/2009/09/16/fmri-gets-slap-in-the-face-with-a-dead-fish/#.UvpXTVJdWbV http://blogs.discovermagazine.com/neuroskeptic/2009/09/16/fm...

grandalf 13y ago

This is very similar to the shape of the google trends graph of "fettucini".

api 13y ago

I am not particularly a gold bug or even a fan of this site, but I have found this chart interesting for a long time: http://pricedingold.com/charts/DJIA-1900.pdf http://pricedingold.com/charts/DJIA-1900.pdf The pattern is fairly well established at this point. I am not sure exactly what it means and I'm not sure the obvious interpretations that most people would have are correct, but it definitely argues for some sort of pulsing macro business cycle. My own hypothesis is that gold's value vs. paper/stocks is a decent indicator of "fear" -- people flock to commodities like gold, silver, and real estate, as well as to bonds, etc. when they don't believe the market is sound. Thus gold's value rises during these times relative to paper currency, which depresses the value of the stock market when priced in gold. During times of hope/exuberance, the opposite occurs. People flee static investments for dynamic ones. Who wants to own a lump of metal when the markets are hot? There hasn't been a really big macroeconomic "growth story" since 1999, thus this graph. If the pattern continues, this graph argues the same thing. Given that this is a repeating and established pattern, it's a much stronger argument than the correlation in the original article up top. It argues that we have not yet "hit bottom" in the current macro cycle and that one more crash of some sort lies in the near future before the economy resets itself for the next growth cycle. (Argues, but does not prove, of course.)

lutusp 13y ago
> but it definitely argues for some sort of pulsing macro business cycle. Not really. Without an explanation, it's three bumps having no significance. If you watched a sequence of coin toss outcomes, some heads, some tails, and called the heads outcomes "market surges", you would see the same kind of pattern, but without any real meaning. Remember that to a scientist, the default assumption is not that an observed pattern has significance, but that it doesn't -- it's called the "null hypothesis". There's a world of difference between describing a pattern, and explaining a pattern. More here: http://arachnoid.com/randomness http://arachnoid.com/randomness
- api 13y ago
  Don't repeating patterns increase the likelihood that the pattern is non-random with each repetition? If you saw a graph of coin flips that showed a clear sinusoidal pattern and that pattern continued over many cycles, wouldn't it be reasonable to at least suspect that the coin was not "fair"? One cycle, maybe not. Two, okay, I'm slightly suspicious. Three, four, five? Of course the pattern says nothing about causation, just that something is biasing the output somehow. I am not a statistician but I do have a fair amount of background in things like information theory, and I find it very hard to believe that regularity has zero significance. Plug that output into Shannon's equations and compare it with a random source. Or doing VBR mp3 compression on /dev/urandom vs. a piece of music. The fooled by randomness argument can be taken too far. In a reductio ad absurdium you could argue that I do not exist because theoretically a random source could produce what I just typed. You would theoretically be correct. If you output digits of pi long enough, they will contain this text.

mcguire 13y ago

Crestmont Research Stock Matrix: http://www.crestmontresearch.com/docs/Stock-Matrix-Taxpayer-Real1-11x17.pdf http://www.crestmontresearch.com/docs/Stock-Matrix-Taxpayer-... Key and other versions: http://www.crestmontresearch.com/stock-matrix-options/ http://www.crestmontresearch.com/stock-matrix-options/ 113 years of stock market returns, adjusted for taxes, inflation, transaction costs, etc. Plus extra bonus history.

ergoproxy 13y ago

Bear Stearns failed mid-March 2008. Despite this, on March 27, 2008 Mark Hulbert gave serious weight to Richard Band's prediction of an "uptrend that could carry the blue chip indexes to all-time highs by late 2008 or early 2009. Dow 16,000 here we come!" http://www.marketwatch.com/story/dow-heading-for-16000-richard-band-says http://www.marketwatch.com/story/dow-heading-for-16000-richa... And on April 18, 2008, Hulbert said "The Dow Theory appears poised to go on a buy signal..." http://www.marketwatch.com/story/dow-theory-poised-to-trigger-a-buy-signal http://www.marketwatch.com/story/dow-theory-poised-to-trigge... Following this advice, you would have bought near the top of the market, when what you really want to do is buy low and sell high... Hulbert is probably the most knowledgeable student of DOW history. He knows that what happens to the DOW in the short run is mostly meaningless noise. He should take his own advice: "Some psychological researchers, for example, have presented series of random numbers to human subjects and then asked them whether there are any patterns in the data. Overwhelmingly, the subjects claim to have detected patterns in the data. "We should keep this research in mind as we watch the stock market day in and day out. We may think we have detected a pattern, but that doesn't mean that it really exists." Quoted from: Market Watch (April 3, 2007) http://www.marketwatch.com/story/dont-read-too-much-into-stock-markets-first-quarter-results http://www.marketwatch.com/story/dont-read-too-much-into-sto...

dllthomas 13y ago

The big question to my mind is how many other points there have been between then and now where this chart would have fit at least as well.