The period of 1929 to 1932 was one of the most jarring and horrendous financial calamities in the history of the United States. The Dow Jones Industrials Averages (DJIA) declined from an early September high of 381.17 in 1929 to a final low of 41.22 by early July 1932, a staggering 89% loss.

The DJIA of 1929 was the NASDAQ of its day, with high technology and innovative names as significant components, such as Radio Corporation of America (wireless technology) and General Electric Corporation (GE). It was the premier high growth index.

The price to earnings multiple of the DJIA at the high month of September 1929 was 19.46, not unreasonable at today’s standards. Still, by the end of the market decline, the multiple had dropped to 11.43, while the earnings of the component stocks melted down into the depths of the depression. So, what many view as a reasonable multiple today would have been considered relatively high by rational fundamental investors of the late 1920s to early 1930s.

There were five separate bear market rallies that were selling opportunities during the 1929-32 decline.  

The first was a massive percentage gain from the November 1929 stock crash lows to the March 1930 highs of 47%. It was close to a 50% retracement of the prior decline. The index price found a high just under what had been previous support, a logical place for upside resistance and a selling opportunity. The market then succumbed to another wave of selling that drove stocks down from that secondary peak by close to 46%.

The second bear market rally started in late December 1930 and ended in March 1931 with a gain nearing 24%. On the next selling campaign, the market declined 38% into the beginning of June 1931.

The third rally was very short in time, but the market decisively pushed stocks upward into the beginning of July with a 29% gain. Then another major sell-off brought stocks lower from that peak by 45% into October of 1931 low.

During the fourth rally, stocks gained 38% by mid to early November. From that lower peak, stocks declined 42% by early January 1932 for the next low.

The fifth and final bear market rally moved stocks up by 32% into May of 1932, and from that point, there came the final decline into early July, with the DJIA down 55%.

From the start to the end, every up move was a selling or short selling opportunity and a chance to save capital for many and for some to make money by selling short.

What can we glean from this model of history? For one, countertrend trading is not only extremely difficult it can be dangerous to one’s financial health, especially when the trend is down. But when executed flawlessly short selling on pullbacks or rallies to trendline resistance in a downtrend, one can make sizable gains in a bear market of that magnitude.

The 60-year cycle, which we term our master cycle, had a swing trading high on May 31 of 1962, and several subsequent intervening swings with a low for the year coming in on June 25. Let’s see if this roadmap fits going forward.

The 90-year cycle discussed above found the bear market low on July 8, 1932. Forty years back, the market saw a low for the year on August 8, 1982. Twenty years back, the market found a low on July 24, 2002, with a test of that low later in the year.

For now, we will stick with our master cycle for the big picture move. And we will look for swing highs and lows on or about these dates of interest. June 1, June 9, June 15, June 21, and June 28.  These are dates to be aware of and to look for reversal potential. All dates are plus or minus one trading day.

Trade well and stay safe, JHS

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