It's 1932 All over Again


"As dust settles from first boom, investors again look for the bust."

During the Great Depression (GD), FDR acted nearly exactly as we have in the Great Recession (GR)—expanding the size and scope of government and pushing through new spending bills to incite economic activity. However, as the dust begins to settle from the first boom, investors are again looking for the bust.

The DJIA is repeating history, forming the dreaded head and shoulders (H&S) technical pattern that sent stocks into a second bear market in 1932, following a few short years of stimulus-driven recovery. In 2007, the DJIA formed an H&S pattern, and a bear market followed as it did in 1929. Today, the DJIA has formed another H&S, as it did following recovery in 1930 wherein stock markets prepared for another downleg. If those technical indicators aren't enough to make you scream sell, take a look at the "death cross."

The death cross (DC) is actually made up of the 50- and 200-day moving average (MA). When the 200-day MA crosses above the 50-day MA, as it soon will, the market is said to go bearish. When the 200-day is below the 50-day, the market will soon rise.

Currently, both MAs are >10 points apart on the S&P500; so, just a modest dip in the stock market will bring an even deeper plunge ahead. The DC's become even more powerful, as investors trade more technically than ever before.

The most popular trade following a DC is flight from stocks and equities into hard assets and deflation-resistant debt obligations. Should the DC arise—expect an equities selloff, then a brief increase Treasury market activity and eventually a move to hard assets.

Today's prices may be the cheapest we'll see for precious metals in some time, given demand nearly maxed out at $17 silver and $1,200 gold—prices far higher than this time just one year ago.

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