February 26, 2011
In response to a special request, I have created an overlay of two major Dow peaks — the 1937 high following the Crash of 1929 and the 2007 all-time high. When we align the two highs, we see a radical parting of ways a little over three years later.
We can analyze market data with trendlines, flags, and Fibonacci ratios to our heart's content. But sometimes market behavior is best understood as a consequence of historical events. The Battle of France in May 1940 was one such example. Perhaps the Federal Reserve's second round of quantitative is another. The results to date have been dramatically different.
We can look back on Dow history and see the tumultuous impact of World War II on the market and the dramatic recovery that followed. The question now is whether a decade or two in the future QE2 will be seen as a masterful stroke of economic management or an ill-conceived delaying tactic ('kicking the can down the road') that worsened the Fiscal Crisis we still must face. This unconventional policy gamble is a game of high stakes — namely, the economic well-being of the US and other parts of the world as well.
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Weekend Chart Feature: QE2 and the Battle of France: