1938 as an analog?

Not a few smart folks have begun to compare the current market with 1938.  I was motivated to do the same after reading a Citigroup report this morning, and the particular catalyst was this quote . . .

Spookily enough 2 things that facilitated that bear market rally in 1938 were

  • The establishment of the up-tick rule [today we've reinstated the rule]
  • The suspension of the then existing mark to market rules . . .

Before looking further, let’s consider why we should bother, and for that we turn to the well-worn Mark Twain quote about history not repeating but rhyming.  That idea is also one of the three tenets of technical analysis (the following are from Technical Analysis of the Financial Markets, by John J. Murphy):

  1. Market action discounts everything
  2. Prices move in trends
  3. History repeats itself

Now let’s jump into the charts.

First, here’s 2007 to the present . . .2007







Second, here’s 1936 . . . 19361







Now, here are the two of them overlaid.  The bottom panel is the 1936-1940 period.  The bear market rally off the March low (another similarity) resulted in a 61.2% gain.  So far, the current rally has advanced by 24.5%, so it could have a ways to go.  We can look at the current rally through the lenses of time and price.  If through the lens of time, then the current rally might run through mid-October.  If through the lens of price, then the current rally could take the S & P 500 to 1,075.


 Let me add one more chart to be able to make a further point below.  This chart begins on 12/31/1999 (white line) and 3/31/1929 (amber line), and it, too, shows remarkable similarity.

2000-192911.  The script from 1929 has been followed so far, and comparisons with the Great Depressions are rampant, so why stop comparing now?

2.  Both the 1938 and the current rally began in March; and

3.  Like then, we’ve [re]instituted the uptick rule and have modified mark-to-market accounting.

What do you think?

Hard to figure out where credit needs to be attributed, but at least a portion needs to go to the Citigroup publication (CitiFX “Technical Developments in the Foreign Exchange and Asset Markets,” 26 March 2009).


4 Responses to “1938 as an analog?”

  1. Wei says:

    You know what they say….history doesn’t repeat itself. Repetition only occurs among historians :-)

  2. Paul says:

    It frightens me to compare to 1938. After all one year later the world was at war.

  3. Good point, Paul. Many would say, though, that it was the War that finally took stocks to above their pre-Depression heights. Many a cynic might say now that what’s needed IS a war. That’s a bit too clinical (not cynical) for me, though.

  4. Irene says:

    Great piece, Graig!

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