History of 1837 repeats itself

It is not the first time in history that housing sector default on account of aggressive expansion of credit to realty sector has pressed the panic button in world equity markets. In 1837 a real estate boom, fuelled by an aggressive expansion of credit, ended in disaster.

The current subprime mortgage default has wiped out over $5 trillion market capitalisation world over. All major benchmark indices have declined by over 10 per cent from the peak levels sometime in February 2007.

In 1837, by the time President Van Buren took office in March 1837, currency shortages plagued the nation. When some banks admitted their inability to honor drafts, the panic spread to Wall Street. By May 10, with runs a daily occurrence, all New York banks suspended operations.

By early fall of 1837, 90 per cent of eastern factories closed. Despite a temporary reprieve in 1838, the depression worsened over the next several years.

Banks, which had accepted overvalued land as collateral for loans used to buy yet more real estate, took it on the chin. United States Bank shares, which hadn't traded below 100 for 20 years, collapsed from 122 in 1837 to 4 in November 1841.

Probably the most influential stock market cycle during the 20th century was the well known decennial cycle. Under this scenario, the US market bottoms in a year ended in '2' and then progressively rises to a peak in a year ended in a '6' or '7' and experiences a crisis and slump.

The market rises to another peak in a 9 or 0 ended years, followed by another market collapse. During the 2000s, the market has been following the decennial cycle according to plan. It hit a bear market low in October 2002 and had been rising ever since.

This is what one would expect from the decennial cycle. In July 2007, the US market experiencing tremors on subprime loans by banks to the housing sector.

7 Market Lows
The US stock market clearly peaks in years ending in 6 or 7 followed by a major collapse. The decline is usually severe (over 20 per cent), but there have been a few years when the fall was quite weak (1927 & 1997).

Significant DJIA market lows were usually recorded in the 5.5 months beginning October 20 of those years ended in 7. Of the 12 market lows, only two did not follow this rule - October 1966 and June 1949. Even so, there was a 1947 correction within the 5/1946 - 6/1949 bear market:

Though the major world market have fallen by over 10 per cent so far, it is difficult to say if the market will breakout here, breakdown, or remain in a range.

However, if the market is likely to decline later, this sort of strength into July (and possibly August) is exactly what you'd expect to see, especially in a "7" year like 2007.

In fact, making new annual highs into July/August is one of the hallmarks of a future "7 year" selloff. At least that's been the case over the past 100 years or so. And the Dow has actually made its high for the year in July/August in seven of the ten occurrences.

The above have been sourced from reports by David McMinn, who has been conducting private research on business cycles