An important correlation can be made between the Nikkei 225, Dow Jones Crash of 1929, and the popular ETFs (DIA, SPY, and QQQ).
Using raw stock data, we produced a percent decline chart of the Nikkei 225 Index from 1980 to 2003:
After the Nikkei 225 index peaked in 1989, it declined about 50% in three years. For the past +10 years, it has been grinding lower, and is now about 80% from its all-time highs. During these +10 years there were occasional 10 to 20% surges, but the overall trend is down.
Superimposing the highest values for the Nikkei index, Dow Jones Crash of 1929, and the ETFs we cover (DIA, SPY, and QQQ), produces the following chart:
When viewing the chart, we find that QQQ is more or less modeling the Dow Jones Crash of 1929. Whereas, SPY and DIA appear to be closer in resemblance to the Nikkei index. SPY correlates more closely than DIA to the Nikkei, so we charted SPY and the Nikkei separately:
Looking at the chart, we find that SPY can easily depreciate 10 to 15% from current levels. Once the index reaches a temporary bottom, it could possibly grind lower like the Nikkei until more reasonable market P/Es are attained. To get a best fit of the lines, we skewed the data for SPY by 12%, while maintaining the integrity of the apex, and obtained a best fit chart of the two indexes:
The best fit chart shows how closely the two indexes resemble one another. It provides support with a reasonable probability that the future of SPY could very well experience the same depreciating trend for future years.
SPY has a high degree of correlation to the Nikkei 225 index, moreso than to the Dow Jones Crash of 1929. Soon, SPY and DIA may reach a temporary bottom, and then experience a few 10 to 20% surges. However, with market P/Es being historically high for the current indexes, it is very probable that the overall trend could be down for many years to come, and until more appropriate P/Es are attained.
And as stated in our previous article,
DJIA Historical Charts,
we believe the future market will be a traders market for many years to come.
We hope this information better informs site visitors and members of our philosophy of the stock market.