Are we living in an era of Depression? The world has certainly lived through an era of turbulent economic times. Since 2008, we’ve witnessed one of the most fearsome market crashes recorded in the history of the Dow Jones Industrial Average Index (NYSE: DIA, Stock Forum), as well as the collapse of Lehman Brothers, Washington Mutual, General Motors, and the forced nationalization of AIG (NYSE: AIG, Stock Forum), Fannie Mae (NYSE: FNM, Stock Forum) and Freddie Mac (NYSE: FRE , Stock Forum). Now approaching the end of 2009, the Dow Jones Industrial Average Index and world wide stock indices have managed to stage one of the most impressive comebacks in history, with the Dow up 61% in nine months.
But are we out of the woods yet?
It might help answer this question by studying the best-known market crash in history: The Crash of 1929. Fundamentally speaking, the roaring 1920s was fuelled by excessive lending to unqualified borrowers from banks, and excessive speculation money in the market. Does it sound familiar? Well, yes. In fact this is exactly what caused the sub-prime mortgage meltdown and the oil bubble in 2008. What a coincidence!
Chart 1. The Crash of October 1929. Chart generated by www.msn.com.
Chart 1 depicts the crash of October 1929 and its after math. Following its peak in September 1929, the index experienced a massive sell off during one short week in October, followed by a period of aftershocks in stock prices. The market found a bottom with a sharp “V” reversal pattern, followed by a failed head-and-shoulders reversal pattern, and carried on a bull market that lasted for six months.
Let’s now dissect the chart of the crash of October 2008.
Chart 2. The Crash of October 2008. Chart generated by www.msn.com.
The Dow reached its all-time high of 14,000 in October 2007. One year later the index was met with a massive week-long sell off, which was then followed by a period of turbulent after shocks. It also had a sharp “V” shaped reversal in March 2009, followed by yet another failed head-and-shoulders reversal pattern. Since then the Dow has ripped and roared from 6,500 to the present day high of 10,500. Again, does it all sound familiar?
Let’s superimpose these two charts together to make it easier to compare them side by side on Chart 3 below.
Chart 3. A super-imposed view of two crashes. Illustration is not to scale. Chart generated by www.msn.com.
Ladies and gentlemen, we have just walked through a live replay of the Crash of 1929 in the present day 2008 – 2009 recession! Time and technologies have certainly changed, but human emotions have not.
So what happens next? Well the Crash of 1929 was followed by The Great Depression of the 1930s, as recorded in Chart 4.
Chart 4. The Great Depression 1929 – 1933. Chart generated by www.msn.com.
It is interesting to note that the period during World War II also exhibited similar features (namely: 1. Crash, 2. After Shock, 3. Sharp Recovery, 4. False Breakdown and 5. a short bull market) on its chart, which was a double-dip recession.
So far, with these two famous market crashes were both caused by excessive lending to under qualified borrowers and excessive speculation money in the market.
Their chart patterns are virtually identical. So the question is: are we living in an era of a Depression? You’ll be the judge.
Copyright 2009  Stockhouse
