Why To Question the 2010 Stock Market Rally

In the past year, we've written a lot about the similarity between the rally of early 1930 and the one we had through April of this year.

The early 1930 rally came after the market had fallen nearly 50% in the fall of 1929. The spring 1930 rally took the market up nearly 50% again, to a level that was only about 20% below the previous peak.

That rally, of course, was also the biggest sucker's rally in history. After the market peaked in April 1930, it crashed again, eventually ending up down 89% from the 1929 high and more than 80% from the 1930 high. The market did not reach the 1930 high again for another quarter of a century.

The rally that recently ended in April 2010 came after a crash that was actually slightly more severe than the 1929 crash (53% versus 48%). It took the market up nearly 80% from the low! The recent rally also lasted longer than the 1930 rally did--a year, as opposed to 6 months.

The 2009-2010 rally that ended in April, of course, may actually be the start of a great new bull market, one that will shake off the current "correction" and roar back to the market's old highs. On the other hand, it may yet also be another version of what happened in 1930--the start of another bear market that will take the market down for years (or even, gulp, to a new low).

Importantly, we won't know for sure what today's market is until we look at it with the genius of 20/20 hindsight. As Peter Schiff pointed out yesterday, even as late as 1931, they didn't know they were in a "Great Depression" yet. On the contrary, the promise from the White House was that "prosperity is just around the corner."

Don't believe it? Check out this excellent compilation of New York Times clippings from early 1930 put together by Dan Alpert of Westwood Capital. There is nary a hint that anyone had any idea about the disastrous decade that was to come.

Dan's complete compilation is contained in a broader research piece, which we've embedded at the end. The slides below contain excerpts from February-April 1930.

Is the current pullback just a "correction" and a "buying opportunity"? Or, as in the spring of 1930, is it the start of the REAL market crash? You be the judge. Meanwhile, here's what things looked like in the spring of 1930...

February 2, 1930: Market recovering faster than expected

“The process of bidding up the “trading favorites” was continued. Last week’s estimates that steel production for the country at large was averaging 75% of capacity, as against an average of 59 in December, seemed to guarantee a considerably larger total steel output this month than in December. The point was made, both in Wall Street and in trade circles, that this represented unusually prompt recovery. After the deflation crisis had reached an acute stage toward the end of 1929, January steel production was only 6 per cent less than in December.”

Source: New York Times
Compiled By Dan Alpert of Westwood Capital

February 2, 1930: Banks Have Started Hiring Again

“So substantial has been the improvement in business recently that a number of brokerage houses which reduced expenses sharply following the break of last autumn are expanding again. In some instances, employees who were let out are being taken back.”

(By the way, note the chart of unemployment in the 1930s above. The situation was okay in 1930. It was later that everything collapsed.)

Source: New York Times
Compiled By Dan Alpert of Westwood Capital

February 5, 1930: The Cash On The Sidelines Is Coming Back!

“Brokers, with the experiences of last autumn fresh in their minds, are being surprised daily, one of them said yesterday, by the amount of cash that their customers are supplying. It was pointed out that the impression was widespread after the break that would be fully a year before the rank and file of traders would be able to repair their financial position sufficiently to get back in the market. It is being proved that a great many trader held substantial amounts in reserve and that they were not hurt so badly as was thought, a partner in one leading house said.”

Commodities Rallying Too...

“The speed with which the stock market rallied in sympathy with the better tone in commodities yesterday is an indication, according to brokers, of the close attention that is being paid to the commodity situation.”

Source: New York Times
Compiled By Dan Alpert of Westwood Capital

February 7, 1930: Easy money is driving a rapid recovery

“The reduction of the bank rates in New York and London yesterday offered another example of apparent cooperation between the two markets. The movement toward lower central bank rates began on Oct. 31, last when both New York and London cut the rate. The Federal Reserve Bank here led the British institution by a week in the next reduction, which came on Nov. 15 here and on Nov. 21 in London.”

Source: New York Times
Compiled By Dan Alpert of Westwood Capital