The Worst Case Scenario - Part II

Back in early 2000, somebody overlapped the NASDAQ chart with that of the Dow going into the 1929 crash. They were almost identical - except that the NASDAQ had much further down to go. The market pundits said: NO-O-O-O WAY! 2000 is NOT 1929, too many safeguards in place now which we did not have back then to prevent the meltdown. The rest is history.

Since it tends to repeat itself, I thought it would be interesting to compare what the markets did AFTER the crash - then and now. Now, these comparisons do need tweaking. Back then the Dow was the leading index. The NASDAQ led in the 90s, so it only made sense to compare the declines between those two. However, it’s best to use the S&P 500 for the post 2000 crash recovery as it was led not by technology but by financials and basic materials.

The Dow made a double bottom in late 1932 - early 1933. So did the S&P 500 in late 2002 - early 2003. The Dow then rallied through the rest of 1933 before correcting in the first half of 1934. So did the S&P 500 in 2003 - 2004. The Dow rallied through the rest of 1934, and all of 1935 and 1936 before turning down sharply in late 1937. So did the S&P 500 in 2004 - 2007. The Dow looks pretty nasty in the first part of 1938 before stabilizing and recovering somewhat in the second half. Well, that’s where the S&P 500 is right now. The 1937-38 correction took the Dow all the way down to the 1934 levels. That’s about 1,150 for S&P 500, give or take.

Now, this is not a prediction. And, again, the argument can be made that I am leaving out too many variables. Could be. This is simply a worst case scenario based on the assumption that chart patterns repeat as they reflect human behavior. It simply pays to be prepare.

Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of proprietary trading data that swing traders can put to work right away. http://www.tradingzoom.com/

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The Worst Case Scenario - Part I

What IF:

- Merrill Lynch, Fidelity, Charles Schwab and everybody else in the investment advisory / money management industry advise their clients that stocks are going to decline substantially from current levels and they (the clients) will be better off in cash for a while?

- Hedge funds announce their intention to short the market?

- CNBC, The Wall Street Journal and the rest of the financial media set off alarm bells by telling their viewers/readers to stay out of the market?

- Financial planners / wealth managers switch their clients’ asset allocations to cash?

The markets are going to crash, because WHO is going to be buying? Pretty obvious - and therefore highly unlikely.

But what is much less obvious (but equally, if not more important) is the simple fact that Wall Street lives off the 1% it charges for managing assets. Pretty simple: no assets - no money. Wall Street is not about to commit financial suicide by telling clients to go into cash because who is going to be there afterwards to tell them it’s safe to get back in? So, in the best interest of their clients Wall Street MUST stay in business by continuing to charge the 1% fee - no matter WHAT the market is doing. In short, it must retain the assets at any cost.

Americans are optimists. Most don’t feel comfortable shorting. They don’t want to hear bad news. Who does? The government does not want to acknowledge it fell asleep at the helm. Institutions do not want to admit they stuffed workers’ pensions with subprime junk. And investors do not want to hear that they are poor. So, here is the worst case scenario:

You will NEVER hear the truth. People are going to be told what they want to hear - namely that everything is fine and that they should stay put by maintaining a long-term perspective. Regardless of what happens.

The global economy is too complex for anyone to be able to read it correctly. Everything is subject to interpretation. There is too much self-interest and enough statistics out there to support any scenario at any given point in time. And they will all sound equally convincing.

What’s the intelligent investor to do? Whom should he believe? The answer is actually pretty simple: stop listening to predictions and follow the market. The tape does not lie because it records actions, not words.

It’s true that the chart only records the past, and you can’t trade in the middle of it. But charts reflect decisions made by humans, and human nature never changes. By comparing the current charts to previously recorded patterns investors can fairly accurately anticipate what is most likely to happen next - without ever listening to a single soul - because it has happened in the past.

To be continued.

Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of proprietary trading data that swing traders can put to work right away. http://www.tradingzoom.com/

Article Source: http://EzineArticles.com/?expert=Slav_Fedorov