Times have been good in the markets these past 10 years or so. And like every other instance in history, good times seem to cause people to forget the bad times.

Since January 30th, the Dow has shaved off more than 2,600 points. That's nearly 10%. But forget the 10%. 10% is nothing. In fact, there may be much more at stake. The last two bear markets experienced by the Dow, (2000, 2007) it lost 38% and 55% respectively. January 30th was the top, we are in for a correction at a minimum of 40% (in my opinion). 

But what happened in 2000 and 2007 isn't worrying market analysts. In fact, some are concerned at how similar this market set up is to the crash of 1929. From 1929 to 1932, the Dow lost 89% of its nominal value.  

Are we setting up for a dark next few years in the stock market? Or will it chug along upwards with a few small bumps along the way?

History doesn't always repeat itself, but it sure does rhyme.

Let's dig a bit deeper and analyze some key similarities and differences.

What about this market is similar to 1929?

1) Sentiment

One aspect of this market that is very similar to 1929 is the overall sentiment of the economy. The general public seems to be excited and hopeful about the economy today like they did in the 20's. 

Remember, the 1920s are referred to as "The Roaring 20's." 

It was referred to as the roaring 20's because the stock market was booming and people were spending their money like crazy, which stimulated the economy. People spent their money so aggressively because they felt richer when looking at their brokerage accounts. This is called the wealth effect.

Central banks can legally buy up stocks and bonds by creating money and stuffing it into the financial system. This is called quantitative easing.

So (theoretically of course) during times of economic instability (remember the 2008 financial crisis) governments can collude with banks and drive up the prices of stocks, thus increasing the value of people's retirement accounts, thus making them feel more comfortable saving their money.

I also find it interesting that this crazy stock market rally is taking place during the presidency of a candidate with the slogan "make America great again." Seems rather fishy to me.

2) The Charts

While no chart can be exactly the same, many chart setups look similar. For instance, though Bitcoins bull market happened in only a year, it looks extremely similar to Silver in it's heyday. 

With the same respect, when comparing the charts of today with 1929, things don't look exactly the same for the Dow. But, they do look similar.

The DJIA since 1997

The DJIA from 1915-1933

You'll notice that both charts have two short and weak bull markets (essentially moving sideways) before a massive run up.

3) Relative Strength Index (RSI)

RSI is a technical indicator used by traders and investors. I won't get into specifics. Simply put, when the RSI of an underlying asset is below 30, it is oversold and one should consider buying. When the RSI is above 70, one should consider selling.

I have the RSI indicator included in both charts above. You'll notice that right now the RSI of the Dow is above 70. In 1929, the RSI was at about 85 before the market crashed. However, you will also notice that in 1926 the RSI peaked above 80, the market pulled back, and then continued upward until 1929, doubling its value. This leads me to believe that it is very possible that the market climbs much higher.

One key takeaway for RSI, is that the best entry points into a market are always at a point on the chart where the RSI is below 30, just saying.

If you want an easy way to look at the RSI of any stock or asset, go to tradingview.com.

What is different about this market?

In 1929, the stock market rose about 500% from its low. Today the market has risen 300% from its low. This is no indicator, and is actually quite arbitrary. But, there is no reason why this market can't rise another 200%. It's hard to say.

While I cannot say with certainty that a 1929-like crash will happen again, it is almost impossible to say that it won't. Markets are completely dependant on the people who buy and sell within them. Humans are irrational beings. If the majority of stock market participants think a market deserves to dive off and lose 90% of its value, then it will happen.

Thanks for Reading!

Disclaimer: I am not a financial advisor. The articles that I write are for educational purposes only. Do your own research and hold yourself accountable for the investments that you choose to make.

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