It’s easy to get caught up in the day-to-day news barrage and meaningless market fluctuations on Wall Street. Additionally, endless discussions as to whether we have hit a permanent bottom or not add to the confusion.
My point has always been that it’s far more important to focus on the bigger picture, which is why I look at major trends via my Trend Tracking Indexes and not minor ones, which may serve the day trader but not the long term investor.
Sometimes it is useful to look at current market activity in historical context to see if there are any parallels to give us some indication as to what might be in store in terms of market direction. Calculated Risk pointed to an excellent chart, which was first featured at dshort.com.
Take a look (double click to enlarge): 
It shows the drops of the worst four bear markets in history. What immediately caught my attention was the fact how similar the Crash of 1929 was (left arrow) compared to this year’s drop of the S&P; 500 (right arrow).
Even though the measurement of the 1929 bear was done via the Dow Jones, while this year’s data represent the S&P; 500, there are uncanny parallels. I can now see where many forecasters have come up with the fact that we possibly could be in a bull market for a year or so, before the bottom slowly and surely drops out again in a similar fashion like in the 1929 crash. This is most likely were predictions of a low for the S&P; 500 of 450 to 650 have come from.
I have no idea, if the markets will play out a similar scenario as in 1929 although current economic conditions clearly support that possibility. However, I am sure of one thing. Many investors will be drawn back into the market if the bullish trend continues for some time. The assumption will be that happy times are here again and maybe they will be.
My view is that far more downside risk remains. However, by the time bearish tendencies become obvious to the public, the lessons of 2008 will be long forgotten, and most buy-and-hold investors will again take another serious portfolio hit as the markets slowly deteriorate.
As time goes on, I will review this chart occasionally to see if the similarities continue or if we in fact challenge history with a new bull market.