The Stock Market Crash Of 1929

With Ying Li breaking out higher and running further, the 300 lots accumulated on Oct 5th last week was showing signs of a good swing trade. Unfortunately for the economy, so many Americans invested money in the stock market that stocks became inflated in price. Now that we are nearing the end of the year, prognosticators will be all over the airwaves talking about their stock market prediction. As a rule, after a huge amount of money is taken out of the market (when SBV declines) we see a rebound (investors start to invest again).

That kind of panic selling tends to feed upon itself, sending the market spiraling lower for an extended period of time. Brokers in the 1920s were allowing their investors to borrow on average of up to 66% on margin , and this was an unprecedented amount of margin that the market ever experienced. See period from July 2007 until May 2008 and period from August 2000 until March 2002. In the fall of 1928 and the spring of 1929 (see Table 1) 8 more stock splits occur, causing the Dow Divisor to drop to 10.77.

To take closer look at the current sentiment on the stock market as well as to define the general market tendency I decided to take closer look at higher-time frame chart in particular on 2-year DJI chart. The history of the stock market did not see such extremely huge panic selling ever before. Altogether, between September 1929 and June 1932, the nation’s stock exchanges lost $179 billion in value. For example, following this strategy and exiting once the VIX crosses 25, you would have moved to cash on September 12, 2008 – just ahead of a 45% stock market plunge.Stock Market Crash

Investors were infatuated with the returns available in the stock market especially with the use of leverage through margin debt. A stock market crash can be distinguished from a bear market by its characteristic sharp decline in stock prices – which can be any double digit percentage – that happens over the course of a few days. After that starting from the September 20, 2008 we still see negative money flow, yet the trading volume is dropping and the number of investors leaving the marked reduces (the red SBV areas become smaller and smaller). Starting from the middle of September 2008 we had records in daily trading volume. The Dow Jones Industrial Average nearly doubled, rising from 191 in early 1928 to 381 by September 3, 1929. Once the VIX breaks above 20, the index is signaling that investors are concerned about the market.Stock Market Crash

In 1995, Rosario Mantegna and Gene Stanley analyzed a million records of the S&P 500 market index, calculating the returns over a five year period.26 Their conclusion was that stock market returns are more volatile than a Gaussian distribution but less volatile than a Lévy flight.Stock Market Crash