That, at least, is the conclusion reached by a frightening chart that has been making the rounds on Wall Street. Yet the market over the past two months has continued to more or less closely follow the pattern outlined in that two-months-ago chart. If this correlation continues, the market faces a particularly rough period later this month and in early March. See chart, courtesy of Tom McClellan of the McClellan Market Report; he in turn gives credit to Tom DeMark, a noted technical analyst who is the founder and CEO of DeMark Analytics.
One of the biggest objections I heard two months ago was that the chart was a shameless exercise in after-the-fact retrofitting of the recent data to some past price pattern. But that objection has lost much of its force. The chart was first publicized in late November of last year, and the correlation since then certainly appears to be just as close as it was before.
To be sure, as McClellan acknowledged: So there is no guarantee that the market has to continue following through with every step of the pattern. But between now and May , there is plenty of reason for caution. Tom Demark added in interview that he first drew parallels with the period well before last November. Another objection I heard two months ago was that there are entirely different scales on the left and right axes of the chart.
Stock Market Crash Of
You can still have a high correlation coefficient between two data series even when their gyrations are of different magnitudes. However, what is important, McClellan said, is that the time scales of the two data series need to be the same.
And, he stressed, there has been no stretching of the time dimension to make them fit. One of the market gurus responsible for widely publicizing this chart is hedge-fund manager Doug Kass, of Seabreeze Partners and CNBC fame.
In an email earlier this week, Kass wrote of the parallels with DeMark is even more outspokenly bearish. You may still be inclined to dismiss this. But many more were laughing last November when this scary chart began circulating.
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