1937 Stock Market Action: A Model for Today?

In March 1937, the Benny Goodman dance craze was in full force. The mood was upbeat.

 

That same psychology was also at work in a rising market. Most investors did not anticipate the serious tumble stock prices were about to take.

 

But tumble they did.

 

Here's what Robert Prechter wrote in the August 2011 Elliott Wave Theorist:

 

I’ve...been using 1937 as a model...the market made its true high in 1999-2000, just like the market made its true high in 1929, after which it had a terrific drop and then a partial recovery into March 1937. And the market has been doing something analogous during the past 12 years.

Here's a look at the 1937-1938 downtrend:

 

 

 

 

As you can see on the chart, prices rebounded after the first leg down, reclaiming 83 percent of the decline. In other words, just when it seemed the worst was over, the bottom really fell out.

 

In March 2012, stock prices are within a stone's throw of the 2007 all-time high. The rally has gone on so long that even some of the most entrenched bears have embraced stocks.

 

Moreover, the total assets in the Rydex money market funds have been at a new low. As you know, investors decrease their cash holdings when they believe the stock market is heading up.

 

The only fear in the market has been the fear of missing out on gains.

 

Even so, are we heading for a more literal understanding of "market fear," when investors can't find the exit fast enough?

 

Here's what we do know:

 

• even during the recent rally, the market has lacked strong momentum
• critical technical divergences indicate a fractured market
• the market's Elliott wave pattern has become increasingly clear, including the near-term 

Elliott Wave