It Is 1932 All Over Again

By Dr. Jeffrey Lewis  Jul 7 2010 10:12AM

The Great Depression is a time that stands out as a time of great debate.  During the Great Depression, FDR acted nearly exactly as we have in the Great Recession, expanding the size and scope of the government and pushing through new spending bills to incite economic activity.   However, as the dust begins to settle from the first boom, investors are again looking for the bust.

The Dow Shows Weakness

The Dow Jones Industrial Average is repeating history all over again, forming the dreaded head and shoulders technical pattern that first sent stocks into a second bear market in 1932, following a few short years of stimulus-driven recovery.  In 2007, the Dow Jones Industrial Average formed a head and shoulders pattern, and a bear market followed, just as it had 78 years earlier in 1929.  Today, the Dow Jones has formed another head and shoulders, just as it had following recovery in 1930 in which the stock markets prepared for another down leg.  However, if those technical indicators aren't enough to send you screaming sell, take a look at what traders like to call the “death cross.”

The Death Cross

Known as the “death cross,” investors look for a very important technical indicator to point the future for the markets.  The “death cross” is actually made up of the 50 and 200 day moving average.  When the 200 day moving average crosses above the 50 day moving average, as it soon will, the market is said to go bearish.  When the 200 day moving average is below the 50 day moving average, the market will soon rise. 

Currently, the two moving averages are less than 10 points apart on the S&P 500 index, showing that with just a modest dip in the stock market, we can expect an even deeper plunge ahead.  The death cross has become even more powerful as more investors trade more technically than they ever have before, and with just one little X, the whole market could enter into a massive selloff.

Metals to Prosper

The most popular trade following a “Death Cross” is a flee from stocks and equities into hard assets and deflation-resistant debt obligations.  Should the death cross come to bear, expect a selloff in equities, followed briefly by an increase in activity in the Treasury markets, and then eventually a move to hard assets like gold, silver, and other commodities. 

Investors should expect that the physical markets will be the first to move, with a strong appetite for physical gold at $1,200 an ounce originating in Asia, as well as small time players gobbling up silver at near $17 per ounce.  Both those prices, just ticks from today's prices, are solid support levels, allowing for virtually no drop in either commodity before buying interest takes over selling interest. 

Today's prices may be the very cheapest that we'll see for precious metals in quite some time, especially with demand nearly maxed out even at $17 for silver and $1200 for gold, two prices far higher than this time just one year ago.

Dr. Jeff Lewis

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Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-R eview.com