Markets will be a sea of red for a while to come yet

(excerpt)

After Monday's capitulation in the stock markets, which, if you read last week's missive, came right on cue, followed by yesterday's formidable rally, it's time to ask, 'Where next for the stock market?' I'll warn you right now – judging by past experience, the outlook is not pretty.

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More similarities between the bust of 1929 and now

As you might know, I am fond of drawing parallels between 1929 and now. The cause of today's boom and bust – too much credit – was the same as the cause of the bust of 1929, so it is not unreasonable to expect the post-bubble contraction, the environment we are in now, to unfold in a similar manner.

My sincere thanks, as always, to Nick Laird of www.sharelynx.com for preparing these charts for me. Our first chart below shows the Dow Jones from August 1929 to April 1930.

Next we see the Dow from August 2008 to April 2009.

Although this time around, the Dow peaked a year earlier in October 2007, the pattern of the two crashes from September to November is virtually identical. On both occasions, the market then enjoyed a rally into December, but the modern Dow then began an inexorable decline into March, whereas the 1929 Dow rallied until 17 April 1930.

In early March this year however, the stock markets made a low (an event which, if you'll forgive me for blowing my own trumpet a little, I nailed to the day - Stock markets are about to rebound sharply). Markets then embarked on one of the sharpest rallies in their history, back up to their October and January lows, and appear to have peaked last Friday, April 17th.

The outlook for stock markets is not pretty

So what now? Well, as Winston Churchill said, "The farther back you can look, the farther forward you are likely to see." So let's look at what happened after the rally into spring 1930.

I'm afraid it's not a pretty sight. After the Dow's rally into April 1930, when US financial publication Barrons declared, "it is thus apparent that the public preference for stock is… as marked as ever," the Dow embarked on one of the most horrible bear markets ever.

What is worrying me is that, of late, we have had numerous articles – similar to the Barrons one mentioned above - asking, "Is the worst over?". Let us hope the above chart is not an indicator of what's coming next.