Tom DeMark, a well-known market timer, has drawn a striking comparison between the current stock market and the market conditions leading up to the infamous 1929 crash. While the accuracy of such comparisons is always debatable, examining these parallels is crucial for investors to maintain an open perspective and consider all possible market scenarios. In the unpredictable world of finance, acknowledging various viewpoints and managing risk are paramount.
DeMark, who identifies as a “market timer” rather than just a “technician,” recently highlighted concerning similarities between today’s market dynamics and those preceding the 1929 stock market collapse. According to a Bloomberg report, DeMark suggests the market is poised for one final rally before facing a potentially steep downturn. He points to weakening market breadth as a critical indicator.
“The market’s going to have one more rally, then once we get above that high, I think it’s going to be more treacherous,” DeMark says. “I think it’s all preordained right now.” He feels this is probably irrespective of how and when the crippling impasse in Washington is resolved. “If you look at the new highs and new lows on the [New York Stock Exchange],” he says, “every time we made a higher high, there were fewer stocks in the index participating in that high. It’s getting narrower.” And once that happens, you typically get a collapse.
10-15-13 djia 1929 and todayDeMark’s 1929 Market Comparison: A Closer Look
DeMark’s comparison of the current market to 1929 hinges on the concept of market breadth. Market breadth refers to the number of stocks participating in a market rally. A healthy market uptrend is typically characterized by broad participation, meaning a large number of stocks are making new highs. Conversely, weakening market breadth, where fewer stocks participate in new highs even as the overall market index rises, can be a bearish signal. DeMark observes this narrowing participation in the current market, mirroring the situation before the 1929 crash. This historical market comparison suggests that the current rally might be unsustainable.
Market Breadth and Potential Downturn
The concern around narrowing market breadth stems from the idea that a rally driven by a decreasing number of stocks is inherently fragile. It indicates that the market’s upward movement is becoming increasingly reliant on a smaller group of companies, while a larger portion of the market lags behind. This divergence can signal underlying weakness and vulnerability to a broader market correction. Essentially, when fewer stocks are driving the market higher, it becomes more susceptible to a downturn if those leading stocks falter. This analysis of market breadth is a crucial tool in technical analysis for understanding the health and sustainability of market trends.
Different Perspectives on Market Analysis
While differing opinions are common and healthy in market analysis, the issue of market breadth is a point of significant agreement among many market commentators. Even if one doesn’t fully subscribe to DeMark’s dramatic 1929 market comparison, the observation of declining market breadth remains a valid concern. It’s essential to consider various market comparisons and viewpoints, even when they diverge from your own investment strategy. Disagreements and diverse analyses are integral to a robust and dynamic market environment, pushing investors to consider different angles and refine their approaches.
Portfolio Preparedness in a Complex Market
Regardless of whether history exactly repeats itself as in 1929, the crucial takeaway from DeMark’s market comparison and the analysis of market breadth is the importance of portfolio preparedness. Are investors adequately positioned for a market that might not always trend upwards? Risk management should be a cornerstone of any investment strategy. Instead of solely hoping for continued market gains, it’s prudent to assess portfolio risk and consider strategies that can mitigate potential losses in a market downturn. Diversification, hedging, and a thorough understanding of your risk tolerance are essential components of navigating today’s complex market landscape.
Sources:
Hedge Fund Chart Guru Tom DeMark Sees Dark Days Ahead (Bloomberg)
This Ominous 1929 Parallel Warning of a Stock Market Crash (BusinessInsider)
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