Another angle why markets are heading lower

I think if any comparrison at all we are in 1930 and have not seen the current sell outs low yet but that I discussed already - so have another idea to the matter but bear in mind just by common sense markets are severely overvalued.

Excerpt

History Lessons on a Historic Day

By RANDALL W. FORSYTH | MORE ARTICLES BY AUTHOR

Pundits point to 1932, but for the stock market 1938-42 may be the apt analogy.

SINGLE PAGE Subscribe Now With these readers: Or copy the rss link: HOW MANY TIMES HAVE YOU HEARD in the past few days that Barack Obama takes office in the midst of the worst economic crisis since Franklin D. Roosevelt was sworn in as president in 1932? Pundits everywhere have been quick to make the comparison between Obama and FDR, both coming into office after administrations headed by hugely unpopular Republicans who oversaw stock market crashes and banking crises. And after equities suffered their worst losses in 2008 since 1931, investors are apt to agree with such facile comparisons. Leave aside the differences between then and now. The former Bush Administration may be accused of lacking a coherent policy as it bailed out Fannie Mae and Freddie Mac, let Lehman Brothers fail and then pushed through the $700 billion TARP plan that has morphed several times. But it can't be accused of Hooverite inaction as it tossed out billions in bailouts. Nor can the Bernanke Fed be called passive as it concocted an alphabet soup of lending facilities and more than doubled the size of its balance sheet to offset the contraction of credit. Though its frenetic easing of monetary policy had unwelcome side-effects, such as pumping up the oil and commodities bubble last year, the Fed learned from its failures in the 1930s when it allowed the money supply to contract by one-third during the waves of bank failures of the Great Depression. Yet, on a day that bank stocks led another stinging decline in stocks with the Dow Jones Industrials losing 332 points, or another 4%, you'd be excused for thinking Tuesday that a rerun of the 1930s was underway. Perhaps so, but the comparison with 1932 may not be the apt one. A better analog may be the 1938-42 period, says Louise Yamada, the eponymous head of Louise Yamada Technical Research Advisors and the former head of Smith Barney's technical analysis group. (She struck out on her own after Citigroup, Smith Barney's parent, decided to terminate Yamada's highly regarded group in 2005 as it ramped up the mortgage activities that have served the bank so well ever since.) Investors would be quite pleased if the pundits were right and if this were 1932 all over again. That year marked the bottom after the 89% collapse that only began with the Great Crash of 1929. From its 1932 low, the Dow would rebound and more than quadruple by 1937. Fortunes could have been made in that rally, for those who had capital to commit to the market by then. In 2004, Yamada offered what she called an Alternative Hypothesis, that 2002-2007 would resemble 1932-37. And the market has tracked the pattern of 70 years earlier closely, even eerily. From a double bottom in late 2002 and early 2003, the market rallied strongly into early 2004, which was a year of correction. Then came a renewed uptrend from 2005 until a double top in 2007, into the great debacle of 2008. Subtract 70 from any of those years and you come up with the same pattern. If the past continues to be prolog, what lies ahead for the stock market? In that case, Yamada sees a similar difficult trading range for three-to-four years, as took place in 1938-42. "It might be unrealistic to anticipate a continued point-to-point parallel; nevertheless, were the correlation to extend, the prospect for prices holding above the 2002 lows would then prevail. But, "with everyone jumping on the 1930s price and deflation bandwagon," she wonders if the decade's pattern will continue. In that case, the market's path might diverge from the sideways but choppy 1938-42 pattern. Every cycle inevitably establishes its own unique identity, Yamada continues. A divergence from the pattern of seven decades earlier wouldn't necessarily be for the better. Not to keep you in suspense, but a break of the 2002 lows could carry the risk of significantly greater decline in stocks, she warns. Tomorrow, more of what Yamada is forecasting.