Mark Your Calendars: The Crash of October 7, 2008   (September 22, 2008)

If you believe the pundits and mainstream financial press, the Big Fat Giant Bailout has fixed everything and a Bull Market is now running. Let's examine that thesis before swallowing it whole.

Tongue gently in cheek I am predicting the wheels come off the fake rally on October 7. My reasoning is presented below, but of course the exact date is unknown; October 7 is as good a guess as any other, but October seems to be the right month.

Correspondent azvitt first alerted me to the possible significance of 10/7/08 by sending me this link: Regardless of the day, there are plenty of fundamental reasons to expect the wheels to fall off shortly after the quarter closes on Sept. 30, as fund managers will be desperate to manipulate the market upwards so they can avoid reporting huges losses to their stunned customers/clients. But events may have moved even beyond "big money's" ability to foment their usual close-of-the-quarter rally.

Also, the Great Crash of 1929 occurred on a Monday and Tuesday, with Tuesday's climax earning the moniker "Black Tuesday." That is also one reason I have selected Oct. 7 as the Black Tuesday of the Great Crash of 2008--but it could be Monday, October 13, or Sept. 29. Only time will tell.

Please read the HUGE GIANT BIG FAT DISCLAIMER below. This is not investment advice, it is informed guesswork, a dart tossed in the darkness that is the future, etc.

The The Big Picture ran a chart of the October 1929 crash, but I'd asked frequent contributor Harun for a similar chart even earlier. Let's start with that chart:

I've marked the chart up a bit. Please note the following:

1. Depending on how much rosy fantasy you're willing to swallow, there are two possible analogous points in this chart of the DJIA 1929 and the present: the right shoulder which preceded the Crash, or the first bounce off the Crash.

2. A clear head-and-shoulders top was in place on the DJIA before the Crash.

3. Just for discussion, let's assume 10,460 was not the final low of this Bear Market. In that case, then it is unlikely we've just experienced the "blowout low." But even if you think we have, note how the market bounced and then promptly fell to a much lower low.

In other words, whatever analog point you pick, the results are still the same: a huge drop to a catastrophically lower low. Now it could be argued that Sept. 2008 is in no way analogous to Sept. 1929, but there are fewer and fewer "buyers" of that complacent Fantasyland view.

Note that though the DJIA seemed to "recover" nicely in the aftermath of the Crash, the "real economy" entered a devastating Depression which was only ended by the unprecedented fiscal stimulus of World War II, 12 years hence.

Harun made these exceedingly incisive comments when he forwarded the chart:

The market did recover to levels above the that of the 28th but the economic malaise caused by government intervention lasted until WW II. Part of Paulson's grand new scheme of the government purchasing all the bad debt is lauded as having precedence in the 1930 and the S&L debacle. But buying all the bad paper didn't end the depression and the S&L situation was marginally successful because of a secular bull market that enable that property to be sold over time at a profit or break even.

So the market recovered in 1929 rather quickly but not because of sound economic fundamental but because that is the way markets work. Short covering and those sensing a bottom fueled the "rally". But in the end we face the same problem as then: no velocity. Nothing worked, not the make work projects or purchasing of bad debt; all the schemes failed to lift us out of the depression. And there is no telling how long it would have lasted had it not been for the outbreak of WW II.

The headwinds are different this time. We are not energy dependent nor are we a industrial juggernaut. But without at least re-industrialization, which will have to be done in the face of peak oil, it's back to fraudulent accounting and counterfeiting money (credit expansion) type expansion.

I overheard on CNN that all this is about confidence and therefore largely psychological. Funny, I thought insolvency is a state of being, But I guess if you are broke but confident you can still buy a McMansion, have 2 luxury SUV's and eat steak at Ruth Chris every night.

Given all the uncertainties and complete lack of confidence that "everything's fixed now," then it sure looks possible that the Paulson-Bernanke "save the bankers" rally was nothing more than another right shoulder in a downtrend.

Let's consider a 3-year chart of the DJIA 2006-08 for more data:

1. What slaps us upside the head first is the painfully obvious head-and-shoulders formation and the equally obvious overhead resistance now posed by the 200-day moving average.

2. When a major moving average crosses beneath a longer-term moving average, it's called "the cross of death" because it confirms a major downtrend. Here we have the 20-day MA absolutely crashing through the 200-day MA, with the 50-day MA dropping not far behind.

All three of these basic technical factors pose huge headwinds to any sustainable rally. Recall that stock market valuations are supposedly based on future profits. Exactly where will future robust profits flow from in a wrenching consumer and credit recession? What fundamental expansion in spending and profits will drive a Bull Market from here? To even posit such a rally is ludicrous in the extreme and virtually meritless on every fact-based market driver.

3. Eerily, the DJIA finally surpassed its dot-com-era bubble high of 11,722 (posted January 14, 2000) almost exactly two years ago. On top of the cross of death, the 200-day MA and the head-and-shoulders formation, this previous high now poses huge resistance--resistance that the DJIA has failed to breach multiple times:
July 23: 11,623
July 30: 11,583
Aug. 6: 11,656
Aug. 11: 11,782 (broke thru but didn't hold)
Aug. 22: 11,628
Aug. 28: 11,715 (close but no cigar)

Six attempts and every one failed. The current "rally" may well run up and bounce off the 11,722 level one more time.

Once again: exactly what fundamental, sustainable uptrend in future profits would justify a new Bull Market? Hint: Banks being able to borrow from other banks does not mean profits will suddenly leap.

4. When we look at other indicators, we do not see the extremes which usually mark real bottoms. Stochastic readings are far from oversold, and DMI- is well below its recent highs (DMI- is a measure of negative trend, DMI+ a measure of positive trend). The MACD divergence is also at neutral, meaning it is also far from marking a bottom.

The last time the 20-day MA crossed the 200-day MA was October 2001--the beginning of a Bear market which took the DJIA from over 10,000 down to 7,200. The 20-day MA did not cross above the 200-day until late 2003--over two years hence.

And the hangover from the Y2K/dot-com party was child's play compared to the credit crisis/housing bust/global recession we face now.

5. Virtually all sustainable rallies run from a solid double-bottom. The very best Bull case still requires at the very minimum a retest of 10,460, and the sooner the better.

Question: what if Paulson and Bernanke hold a Credit Fix party and nobody comes? What if there is still great reluctance to lend to other institutions come next week? Since Paulson and Bernanke have already pulled the last rabbit out of their magic hats, then what's left to stem the next crisis of faith/credit crunch? Answer: nothing.

Do ya reckon market players are keenly aware of this? If credit begins tightening once again after the champagne euphoria of the "rally" fades into hangover, then what will every responsible player do? SELL SELL SELL, exiting long positions as fast as possible, especially in financials.

Why? Because there is no way now to hedge the long positions with a corresponding short position. Having banned evil shorts, there won't be any "short covering rally" to stem the cascading sells. It's called "unintended consequences of hastily made, ill-planned financial rescues."

Skeptics of a Crash, please review the following charts for the context of what awaits us. Here are five charts without which the present crisis cannot be properly understood/contextualized:

1. total credit as a % of GDP
2. the housing bubble
3. plummeting housing values
4. financial profits as % of GDP
5. U.S. national debt (just toss another trillion on there, wouldya, Hank? Oh, heck, make it two.)

Add these up and what do you get? Asset deflation, credit deleveraging, consumer recession, corporate profits crash and thus stock market crash. There really is no alternative result of the sum.

For more context, here is a summary of Wall Street Crash of 1929 (Wikipedia)

After an amazing five-year run when the world saw the Dow Jones Industrial Average (DJIA) increase in value fivefold, prices peaked at 381.17 on September 3, 1929. The market then fell sharply for a month, losing 17% of its value on the initial leg down. Prices then recovered more than half of the losses over the next week, only to turn back down immediately afterwards.

CHS NOTE: Hmm, sound familiar?

The decline then accelerated into the so-called "Black Thursday", October 24, 1929. A record number of 12.9 million shares were traded on that day. At 1 p.m. on Friday, October 25, several leading Wall Street bankers met to find a solution to the panic and chaos on the trading floor. With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As amazed traders watched, Whitney then placed similar bids on other "blue chip" stocks. This tactic was similar to a tactic that ended the Panic of 1907, and succeeded in halting the slide that day. In this case, however, the respite was only temporary.

CHS NOTE: Check the action around Sept. 29, 2008.

Over the weekend, the events were covered by the newspapers across the United States. On Monday, October 28, more investors decided to get out of the market, and the slide continued with a record loss in the Dow for the day of 13%. The next day, "Black Tuesday", October 29, 1929, 16.4 million shares were traded, a number that broke the record set five days earlier and that was not exceeded until 1969.

William C. Durant joined with members of the Rockefeller family and other financial giants to buy large quantities of stocks in order to demonstrate to the public their confidence in the market, but their efforts failed to stop the slide. The DJIA lost another 12% that day. The ticker did not stop running until about 7:45 that evening. The market lost $14 billion in value that day, bringing the loss for the week to $30 billion, ten times more than the annual budget of the federal government, far more than the U.S. had spent in all of World War I.

An interim bottom occurred on November 13, with the Dow closing at 198.6 that day. The market recovered for several months from that point, with the Dow reaching a secondary peak at 294.0 in April 1930. The market embarked on a steady slide in April 1931 that did not end until 1932 when the Dow closed at 41.22 on July 8, concluding a shattering 89% decline from the peak. This was the lowest the stock market had been since the 19th century.

The crash followed a speculative boom that had taken hold in the late 1920s....

A few books of related interest:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler

The Misbehavior of Markets

The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb

Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay

Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindleberger

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor

The Great Crash 1929 by John Kenneth Galbraith

The Crowd by Gustave Le Bon

When Genius Failed: The Rise and Fall of Long-Term Capital Management

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities

Fiasco: The Inside Story of a Wall Street Trader

Web of Debt

Financial Armageddon: Protecting Your Future from Four Impending Catastrophes

New Book Notes: My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on for $10.99.

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