The Great Crash of 1929

May 11th, 2007

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A few days ago, back in Crash alert?to short the stock market or not?, we issued our first crash alert. To be honest, we do not know exactly when a crash will occur. But we believe one is on its way. Also, the longer the coming crash is ?postponed,? the more devastating it will be when it finally arrives?the longer it delays, the greater the number of people who will be sucked into complacency.

Today, we will look a bit into history of the 1929 crash. Hopefully, we can learn from them and be better prepared for what is to come. Since most of us were not even born yet in 1929, the investors and traders of today largely forgot the lessons of that unprecedented crash.

Contrary to popular belief, the Great Crash of 1929 was not completely without any warning. As early as November 15 1925, Alexander D. Noyes, a highly respected financial editor of the New York Times, warned in a very long article that the ?speculative mania? of the 1920s was not unlike previous bubbles and that stock prices could not rise forever. Long before the Great Crash, the contrarians of the day were already sounding the alarm.

Also contrary to popular impressions, that Great Crash was not a one-day event. It was a series of events that marked the beginning of an even more devastating consequence?the Great Depression. In fact, it took a year after the Great Crash for the average person on the street to feel the effects of the ensuing Great Depression. Did the Great Crash cause the Great Depression or was it merely a symptom of it? We believe it was the latter.

For five years leading to the Great Crash, the stock market had an amazing run. By the beginning of September 1929, the stock market had reached a peak. Then for the next month, the stock market fell 17% for a month, before rallying for the next two weeks, recovering half of the initial fall. Then it fell again, culminating in a ?Black Thursday? of October 24 1929, in which a then record of 13 million shares were traded. On the afternoon of ?Black Thursday,? a rally reduced the losses. That rally continued on to Friday, which was then followed by weak actions on Saturday. On Monday, the market fell 13% in one day. The next day, which was known as the ?Black Tuesday? of October 29 1929, the market fell another 12% in another record volume of 16.4 million shares.

By November 13 1929, an interim bottom was reached, followed by several months of rally, resulting in an interim peak on April 1930. Then it was downhill again, reaching a bottom in July 1932, which was 89% down from the then record high in 1929.

Can it happen again today? Can the Federal Reserve save us from such a disaster? Remember, almost 80 years ago, people had the same faith in that institution. In the next article, we will extract lessons that we can learn from the Great Crash. Keep in tune!