Paul Tudor Jones Did This…And So Can You
Paul Tudor Jones made
his most famous trade based partially on his realization that the
chart of the Dow Jones Industrials in 1987 looked remarkably similar to the
chart of the Dow Jones Industrials in 1929. In "The Trader," a 1987 PBS show
that chronicled several weeks of his career, Paul Tudor Jones overlaid a chart
of the two time periods and drew the following startling picture.
With the help of Yahoo Finance and an Excel
spreadsheet anyone (namely me) can do today what took Jones weeks to do in 1987.
Overlaying market charts can provide traders and investors an historical context
to help generate ideas. However, traders need to be very careful to not
automatically infer that markets that look similar in the present will behave
similarly in the future. Unless market participants are in a highly emotional
state of mania or crash, they won’t trade alike.
Many analysts have overlaid the 1929 Dow onto the 2000 NASDAQ to highlight the
bearish parallels. However, what most fail to mention is that investors who
bought stock in 1932 did well over the next five years as the Dow went from 40
back to 190 in 1937. In fact, the Dow from 1932-1935 and the NDX from 2002-2005
reveal a rough similarity.
In the following chart, the red line and dates represent the current NASDAQ 100
(NDX) through August 5th and the black line represents the is the Dow Jones
Industrials from 1932 through April 1935.
If the relationship holds, the NDX could power
higher through the rest of the year, much like the Dow did from April, 1935
onward.
On the other hand, a parallel between today’s market
and the 1990s draws a more bearish short term picture. The strong market rebound
out of a recession, the advance by small capitalization stocks, and the Federal
Reserve’s monetary policy are all similar to to the early 1990s. Interestingly
enough the S&P 500 today looks like the period from 1992 and 1993.
This 1990s overlay presents a more bearish interpretation than the 1930s overlay
since the S&P 500 topped out shortly thereafter, declined sharply and traded
sideways in a 20% range for the remainder of 1994.
Currently, I’m leaning toward the bullish 1935 overlay as having the higher
probability of coming to fruition. However, investors and traders need to keep
in mind that if the Federal Reserve continues raising interest rates, the
fundamental backdrop will be more similar to 1994.
Thomas Neuhaus
Thomas Neuhaus is a principle of Investment Management of Virginia, a registered
investment advisory firm for which he co-manages. Mr. Neuhaus’ career has
encompassed all aspects of the investment business from investment banking to
sell-side research to buy-side portfolio manager.