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CMD Advisors


Back to the Future………………. 1938
• Current market activity is very similar to what occurred in 1938.
• This suggests the market is currently very close to the final low (within 5%
or so) for the current cycle.
• The markets should turn up with in the next month and will likely rise by
more than 50% before year end.


As the saying goes those that forget the Nasdaq in the 2000s. Chart I shows the
past are doomed to repeat it. That 2000 to 2009 period overlaid on top of
appears to be what is happening now the 1929 to 1938 period.
with the Depression at least from a stock
market perspective. This is hardly Chart I
surprising with several generations
behind us and very few who remember
it. Commentators are comparing the
current period of economic weakness to
the start of the Great Depression and
from an economic perspective there are
many similarities. Current market
behavior however does not seem to fit
this mold. Rather, the markets appear to
be continuing a pattern of correlation
DJIA 1929-1938 ---
with the 1930s that first became apparent
with the tech bust in 2000. The Dow NASDAQ 100 2000-2009 ---
Jones Industrial Average (Dow) from
1929 to 1933 declined by 89% over 35 This correlation has continued since that
months, while the Nasdaq 100 from time with the sell off that has been
2000 to 2002 declined by 83% over 31 occurring since the fall of 2008 closely
months. It appears the Fed was able to resembling the decline that started in the
prevent a serious recession in 2000, fall of 1937(circled area on Chart I &
however market action behaved as if it Chart II). The decline from August 1937
had not. to the November low lasted 100 days,
while the decline from August 2008 to
The subsequent rise following the the November low lasted 98 days. The
market bottom lasted 57 months for the resulting percentage decline to the low in
Dow in the 1930s and 62 months for the November was 40% for the Dow in 1937
and 42% for the S&P in 2008.
CMD Advisors Inc.
14 Thornhill Avenue, Toronto, Ontario M6S 4C4

CMD Advisors
Interestingly, the 1937-38 period has
been referred to as the depression with in Table I shows the estimated range for
the Depression as a secondary period of the market lows in the current decline
economic weakness developed. compared to the low in 1938. It shows
the expected low value for the S&P 500,
Chart II the NASDAQ 100 and the Dow
assuming a similar decline from the high
195 and low of the trading range following
the 1937 November low as well as
compared to the 1937 November low
itself. The table also shows the
additional decline from the most resent
135 closing price (3/6/2009) that would be
required to match the 1938 low.

Table I

DJIA Aug 1937- Dec 1938 ----

S&P 500 Aug 2008- March 6, 2009 ---

The 1938 low, which occurred at the end

of March of that year, was the bottom
for the cycle with the market rising by
63% to its high in late 1938. The current
low appears to be occurring slightly
earlier than it did in 1938. However, if
the percentage decline is similar, then Both the S&P 500 and the Dow are
the estimated low should be with in 5% already within the range of expected
of the current levels. This more rapid values for the final bottom, while the
decline in the current period could be Nasdaq 100 still appears to have a bit to
signaling either that the rebound will be go. Given market action, we would
more muted and take longer to develop expect these markets to hit the bottom of
than in 1938 or that there is some their potential ranges. Only the Nasdaq
additional downside beyond the lows we 100 suggests significant additional
are suggesting. downside (12%) and we suspect it will at
least come close to the November lows
before bottoming.
CMD Advisors Inc.
14 Thornhill Avenue, Toronto, Ontario M6S 4C4

CMD Advisors
the period. This divergence suggests
underlying strength that may result in a
Some have expressed concern that the commodities rally later this year.
VIX (Chart III) is not showing the spike
up we would expect to see prior to a Conclusion
strong rebound in stocks. We, however,
would not expect a strong spike in the Based on our analysis we would suggest
VIX up to the highs of last fall. The the market is likely within 5% of the
VIX instead seems to be following a final bottom of the current cycle. In
fairly typical spike pattern that occurs in addition, looking at performance
many markets with a rapid rise to a peek, following the final low in 1938, the
a fall, a secondary peek and then a long current market may rise significantly
trail off to levels slightly above those (>50%) over the remainder of the year.
prior to the spike. This pattern has been This would bring the Dow and the S&P
repeated in everything from penny to 9,940 and 1,025 respectively. The
stocks to the Nasdaq peak in 2000. risk to this scenario is that economic
weakness drives stocks lower before a
Chart III rebound or prevents a strong rebound in
stocks from developing.
Charles Dwight, CFA









Commodities, also, appear to be

confirming equity markets are close to a
bottom. When the market declined in
the fall of 2008, commodity markets also
had major sell offs. However the equity
market declines since the beginning of
2009 have not been matched by
commodity declines as commodities
have generally been going sideways over

CMD Advisors Inc.

14 Thornhill Avenue, Toronto, Ontario M6S 4C4