Lessons from past market tops

We looked at 3 major tops (1929, 1973 and 2000) suggests tops are immediately preceded by 1) sustained monetary policy tightening and 2) divergence of surging bubble stocks vs the average stock moving sideways/falling.

2021 has been characterized by late-cycle markets vs an economy emerging from a recession. This is similar to the period after the 1926/27 recession, when equities rallied through the recession and then kept rising.

Valuations increased throughout the period, eventually leading to the infamous 1929 peak. The Dow Jones Industrial Average rose 25% through the recession from October 1926 to October 1927. Then as the economy emerged from recession, the Dow rallied by another 110% into the 1929 peak before the crash.

Source: Bloomberg, Macrobond, Variant Perception

‍From early 1929, there was a 9-month period of notable divergence between surging bubble stocks (utilities + tech, thanks to buzz around new technologies and electrification at the time) and the average stock that went sideways.

Source: Bloomberg, Macrobond, Variant Perception

‍Get the full picture at variantperception.com.