History repeats itself. No place is this more evident than in the stock market. The best way to see it is to view charts of stock indexes. A historical stock chart is a visual representation of investor's mass psychology.
The best index to chart is the Dow Jones Industrial Average. The Dow consists of the biggest, most successfull companies in the U.S. - companies like IBM, GM, GE that make up the backbone of this country's economy. When the DJIA moves up it represents investor's mass optimism in the economy as a whole. Likewise, when it goes down, it represents investor's mass pessimism. The second reason why the DJIA is the best index to chart is that it goes back to 1895. That gives you more than 100 years worth of data to chart and allows you to see the BIG PICTURE. Stocks move with human nature, and are in a long term bull market. The important thing to understand about this is that every 3 steps forward are followed by 2 steps backward. This is the basic market cycle. It has repeated itself many times over the past century.
One myth I would like to discredit is that "The market is different now than it was in the past". To do this we have to define what exactly "the market" is and what it is not. "The market", quite simply is human nature. It is investors mass psychology regarding the future of the underlying companies and the economy as a whole. Even though the companies may be in a completely different industry now than they were 69 years ago, the investors mass psychology could be very similar. In 1929, as now, the stock market had been in a record-breaking bull market which had lasted twice as long as any previous bull market. This made investors feel overly optimistic and caused them to act in an "irrationally exuberant" way (sound familiar?). The current bull market has broken all of the records set by the bull market of the roaring 20's. It also has lasted twice as long and people are now saying that it will continue to go up forever. This is exactly how investors felt in 1929. So, you could say that "the market" today is the same as it was in 1929.
To further illustrate this, please view the following charts. Both of these charts are of the DJIA and both span a 6 month time period. You could say that "the market" was very similar during these two different time periods. You see the "irrational exuberance" pushing prices straight up on the left, then the "2 steps backward" correction taking place.
One of these happened within the past 3 years. The other one happened more than 20 years ago. Can you tell which one is recent?
The chart on top is June-November 1997, the one below is December 1905 through May 1906. Surprised? You should be. There was no Internet in 1906, no high-tech companies, no airplanes, not even an automobile industry! It was a completely different world. But "The Market" was the same! That is, the mass psychology of the investors was very similar, and THAT is what is reflected by the Dow Jones Industrial Average.
As you can see, buying on the dips is nothing new. Investors have been doing this for hundreds of years.
Another imporant point I need to make is that market cycles occur over different lengths of time.
Here are two examples of 2 steps back. One of them spans 2 years, the other one spans 4 days. Can you tell which is which?
The top line is an intra-day chart of the DJIA from June 11-16, 1998. The bottom line is the DJIA from December 1972 through December 1974. Similar, aren't they. Why is this? Investors mass psychology cycles over many different time spans. An example of this in an individual investor would be a person who is long-term bullish on his stocks, but then he sees the turmoil in Asia on the news. He then turns pessimistic (bearish) on the stocks he owns because he knows that those companies have large exposure to Asia. He then calls his broker and sells all of his stock. He has become short term bearish (pessimistic). Two weeks later he sees that the Asia turmoil will not affect those companies as much as he had thought. He calls his broker and buys back the same stocks. While he has been long-term bullish (optimistic) the whole time, he cycled to bearish (pessimistic) for a period of two weeks.
The long cycles are made up of shorter ones, and the shorter cycles can move in the opposite direction as the long cycles making it difficult for the common investor to figure out what the long term direction is.
Here's one last example of similar market patterns over different lengths of time. You don't have to guess at this one.
I couldn't help but notice the similarities between the rally from 1962-1966 and the rally from April-August 1997. Then they became even more similar. Notice the 2 step correction in both charts, the 3 high points, and the right shoulder of the middle high on both charts (1969 & Oct '97). In case you're wondering what happened next, the DJIA finally broke the 1,000 point barrier and topped out in January of '73 at 1,051. It then slid back in a 2 step correction over the next 2 years losing 45% of it's value. It bottomed out at 577 in October of 1974. It's actually pretty similar to what I expect for the rest of 1998, the Dow to break the 10,000 barrier, top out around 10,500 and then crash down to below 6,000. One major difference this time is that it will do it in a matter of months instead of years.