Introduction to Series and Chart Below

In 1937 the economy slumped into The Roosevelt Recession as the fading impact of stimulus spending, incremental costs of new social programs and higher taxes took their inevitable toll.  The stock market crashed in August of 1937 falling more than 30%.

I am not a technical analyst, nor do I generally place much faith in the science.  But I do believe that credit cycles are repetitive.  Furthermore, I observe that the Government's 2-year response to the current downturn has been similarly destructive as New Deal initiatives during The Great Depression.

We presently face an environment where fading stimulus is causing bloated economic data to deflate, newly approved social programs represent an unaffordable burden and higher taxes are looming.  It is 1937 again and the Government seems intent on manufacturing another technical recession. 

Thus far the stock market seems oblivious to what I have considered to be inevitable since misguided stimulus began to be implemented.  With the ominous month of October looming there are a variety of fascinating reasons why a market correction could occur. 

As such I present "The Interesting Case for an October Stock Market Correction".

I am not a market timer.  There are a near infinite number of dynamic forces which trigger a market correction.  No one can accurately predict sizeable, broad market movements with specificity.  Those that do and are correct are lucky.   

I do believe, though, that with a fundamental understanding of dynamic economic forces, one can predict broad market movements over reasonable periods of time.  This is what I have attempted to do since 2005 with success.  An October correction would be consistent with The Affordable Mortgage Depression framework of economic understanding.

I do note for the sake of full disclosure that when hazarding more precise predictions, I have consistently overestimated the speed with which the public has come to appreciate the impactful economic events of the past 5 years. 

Most recently, I believed that a widespread loss of economic confidence might occur as early as the 1Q of 2010.  Instead, upward trending spending, Census hiring and peaking housing stimulus subverted reality from the public consciousness until recent months.  

A 15 Month Correlation With 1936 and 1937

A July 9th article by Donald Luskin observed stock market similarities between 1937 and the present.  Given economic conditions which are eerily reminiscent of those which existed prior to FDR's Recession, the comparison is noteworthy.

Link to WSJ article "Why This Isn't Like 1938 - At Least Not Yet"

The chart below represents the percentage performance of the DJIA relative to its period high-water mark.  The graphic includes 17 months of data from May 1936 - October 1937 and 15 months of data from July 2009 - the present (midday 9/20/10).  With the exception of June 2010, the performance correlation between the DJIA in '37 & '38 and the last 15 months is striking. 





Should the 15 month correlation continue, a stock market correction would commence on approximately October 1st.

Part II in the series to follow.