Even A Deflating Balloon Can Still Explode – Gearing Up For A New October Crash?

We have been studying the behavior of the financial markets in the past few months and quarters was we are convinced that not only is the economy running out of steam, there might be another overdue correction.

What really frightened us is the fact there are several similarities and correlations with the previous market crashes in 1929 and 2008. Let’s start with 1929 and pull up a first chart. You can clearly notice there was a brief stock market slide which was converted in a temporary uptrend before the entire index was completely crashing.

Source: Wikipedia

This seems to show an awful lot of similarities with the situation we’re currently in:

Source: stockcharts.com

Just as in 1929, the market was performing fantastically and the continuous wealth increase seemed to be unstoppable. A short 10% correction was seen as ‘healthy’ and soon a new uptrend was starting (the green line). This is exactly the same scenario we saw in the past few weeks. Market commenters said the 10% drop in the Dow Jones was a ‘healthy correction’ and we’re on our way to the next uptrend and Christmas rally.

Are we?

Let’s have a look at why the stock market crashed in 1929. First of all, the harvests were higher than expected, pushing farming families into poverty. Additionally, the house sales, car sales and steel production were falling back down to earth in the USA. Is this once again the case in the US? Not really, but keep in mind this is a globalized world and you’ll have to look at the global picture. So let’s expand our horizon and focus on for instance China, which undoubtedly is one of the main (if not, the main) economic forces on this world.

Source: RBC

There’s no real crash in the steel production but that’s usually an ‘ex post facto’; the real drop in the steel production numbers usually occurs àfter the second leg down has started. In that view, the stagnating steel production in conjunction with a reduced demand for iron ore is already an important sign the steel mills aren’t too optimistic about the future and want to reduce their existing stockpiles before taking on too much balance sheet risk.