Sentiment Speaks - What The Charts Say About A Possible 90% Drop In The Stock Market (2024)

The Dow Had An Incredible Run Over The Past 100 Years

The Dow Jones Industrial Average has made an incredible run since lows that in 2009 during the last financial crises that struck the global economies. After hitting a peak of 14,198 on October 1st of 2007, the Dow fell some 54% to a low of 6469 on February 28th of 2009. Since that low and into the highs that were struck most recently the Dow is up more than 20,000 points or over 300% as it approaches 27,000.

Even more impressive is the run that the Dow had made over the much more extended period of time since the depths of the Great Depression. At the lows of the Depression in July of 1932, the Dow traded at of just 40 after peaking at 386 on Sept 1st of 1929. This drop of 346 points off of the peak in 1929 and into the lows of 1932 represented a drop of close to 90% in the value of the Dow. Of course, that low of 40 and subsequent run into the recent 27,000 high represents a gain of more than 67,000%. Looking a more recent significant bottom if we take the low that was struck in after the 1987 crash at 1616 into the most recent highs of 27,000 we have a gain of over 1,500%.

So after such an incredible run from these major historical bottoms, the question we now ask is how much further can this run continue and are we really in store for the biggest sell-off in American history?

Biggest Sell-Off In American History Ahead?

In an interview last week with John Catsimatidis Stephen Moore, President Trump's former pick for Federal Reserve Board, was speaking about the economy, the stock market and the policies that some of the Democratic politicians have been promoting recently. Moore mentioned by name the green new deal, Medicare for all, reparation payments, and guaranteed national income. He then went on to state that “If people actually thought these ideas were going to come into play and enter the White House, you would see the biggest sell-off in the stock market in American history, and that is a danger.”

To date, the biggest sell-off in the stock market American history occurred during that period from 1929 – 1932 when the market dropped close to 90%. So if we were to see a sell-off even bigger than that drop, say 91%, it would see the Dow Jones Industrial Average drop more than 24,000 points and move down below the 2400 level. Levels not seen since the 1980s.

Now, while over the longer term, and some time in the next decade I do think the stock market will see the biggest sell-off that most of us have ever experienced. I do not think it will be quite as large as the crash that occurred from 1929 – 1932, I do however believe that it will likely have echoes of that crash as far as how the global economies will be affected.

Furthermore, this correction is not going to be caused by any particular political party or policies of that party, but rather by the collective social mood of the participants in the stock market and the greater economy as a whole. This same collective social mood will drive the policies that ultimately take effect, but those policies themselves will not be the driving force behind any market correction. We have seen time and time again when pundits will assure us that if a particular event happens the market is sure to act a certain way. The vast majority of the time, however, these predictions are not fulfilled as promised. Most recently we saw this when we were all but assured that should Trump win the election the market would inevitably crash. Not only did this not happen but since the election, the market has seen a rise of over 30% since the election of Donald Trump.

Market May Be Closing In On Its Final Leg

Two weeks ago I wrote about what I saw on the shorter timeframes on the Dow. In that article, I noted that we are close to a short term inflection point. As the topic of this article is focused on the larger degree trend, I am going to focus the analysis on what the chart of the Dow looks like in a multi-decade perspective rather than just a multi-year point of view.

As can be seen on the chart below I am counting the Dow in the final leg of a larger degree third wave off of the 1934 low. Now as I noted in the previous article on the shorter timeframes, I do still think that this generational bull run has not quite completed. The Fibonacci levels that I am watching overhead currently come in between the 29,109 – 40,992 zone. So as long as the Dow holds over longer-term support I still expect to see these higher levels hit over the course of the next several years prior to making that multi-decade top.

With all of that being said from a more macro perspective I do think that we may very well be on the final leg of that run and getting quite close to entering a long and large bear market. The key longer-term support levels that I am watching on this timeframe currently come in at the 20,671-16,729 zone. Should the Dow move through this zone then it opens the door to see a larger market correction that could ultimately take the Dow back down towards the lows that were struck back in 2009 and potentially even lower.

Given that this drop down into those levels is likely to occur from levels higher than where we are currently trading a move down into the 6000 are would be a very larger percentage point drop. This would be the largest drop that this generation has experienced which makes sense given that the next major fourth wave drop is of the same degree of the second wave drop that began in 1929.

Whoever is in office when this next crash begins will likely be blamed for causing it but the reality is that we are on this course regardless of who takes office. The policies that are enacted will be the reflection of the sentiment of their constituents and not the underlying cause of any market crash. So while I do agree with Mr. Moore that we are likely to see a very larger market crash in the not too distant future, I do not agree that it will be the Democrats that will be the cause. There is only one true cause of the ups and downs of any freely traded market and that is the collective Sentiment of those who participate in that market.

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Michael Golembesky

Michael Golembesky is a senior analyst at Elliott Wave Trader and a renowned practitioner and educator in applying Elliott Wave analysis to trading forex and volatility instruments. He is a popular speaker at financial forums and conferences in the U.S., including The Traders Expo and The Money Show, and widely syndicated on sites including MarketWatch, Seeking Alpha, and Nasdaq.com.

Michael is a contributing author to the investing group The Market Pinball Wizard where they help members gain a more real-time understanding of where the market is likely heading. Features include: daily S&P 500 directional analysis, intraweek metals analysis, weekly expanded analysis on the S&P 500, metals, USO, and USD, weekly live webinars where we walk you through the charts we are tracking, and community chat with direct access to the team of analysts to ask questions. Learn More.