Thursday, September 12, 2013

WATCH OUT BELOW: S&P 1987 Compared with S&P 2013

Note the 1987 chart is adjusted by one month. The crash in 1987 did not occur until October 19, 1987.

It's a terrible mistake to just look at the data from two time periods and forecast the trends to continue. However, as I have been pointing out at the EPJ Daily Alert,  there are many reasons to suspect another crash may be on the way:

1. Money supply growth has declined dramatically since the start of the year.

2. There is a natural tendency for the consumption-savings ratio to move towards consumption, starting in September.

Indeed, I wrote this in the ALERT on August 29:
I have discussed many times in the ALERT that there is a natural move in the consumption-savings ratio towards consumption in the September-October period, as people start to buy school clothes and winter clothes, which then develops further into the consumption/Christmas season. This natural tendency, when combined with slowing money growth, which we now have, can cause the September-October period to be a period very vulnerable to a stock
market crash. 
At MarketWatch, Mark Hulbert discusses the remarkable  tendency for weakness in September:
Since the Dow was created in 1896, it has lost an average of 1.09% during September. The average return during all other months, in contrast, has been a gain of 0.75% — a spread of 1.84 percentage points between September and all other months’ average. 
That’s huge, from a statistical point of view. 
Not only that, September’s dismal performance has been remarkably consistent. Consider what I found when I focused on all decades since the late 1800s: September’s performance rank relative to other months was 8th or below in all but one of those decades. In fact, the month was in last place in five of the decades, and in 11th place in three more.
As I have pointed out many times, it is very dangerous to just look at empirical data and make assumptions about the economy or stock market. However, the deductive analysis of why the stock market tends to decline in September/October supports Hulbert's empirical research.

BTW: In the summer of 1987, money supply, in the manner I track it in the EPJ Daily Alert, collapsed, just like it has this summer.

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