What phase of the stock market are we in? Let's consider a few facts.
The all-time high for the Dow Jones Industrials is 14,164 (October 2007). Then the trend changed. By the time the index hit the March 2009 low of 6547, stock portfolios were devastated and investor fear was pervasive. It felt like there was no market bottom in sight. The collapse was rightly described as the worst since 1929.
The comparison to 1929 is instructive. In that year, the Dow reached a September high of 381.17. After the October Crash, prices actually rallied into early 1930. But then came the second leg down, which was worse than the first: All told -- from the 1929 high to the low of 41.22 on July 8, 1932 -- the Dow lost 89%. This was panic on an epic scale.
Fast forward to the recent past: You know the market rallied from the March 2009 low to 11,205 on April 26, 2010. Since then the market has started to take back some of those gains.
So: Have we started a "second leg down," which will be worse than the 2007-2009 crash? Could it be like (or worse than) the market of the early 1930s?
The answer depends on investor psychology -- specifically, how long investors were in an "exuberant" phase before the trend changed from "bull" to "bear." Here again, we can compare today with the 1929-1932 period.
Investor exuberance from 1921-1929 was so great that we call that decade the "Roaring Twenties." In turn, recent decades -- 1974-2007 -- make it clear that investor exuberance was about four times longer compared to the 'twenties!
This chart is from the August 2009 Socionomist, a monthly publication from The Socionomics Institute (a sister organization of Elliott Wave International):
The extended exuberance of 1974-2007 points toward a "panic phase" to follow, which could last longer than the 1929-1933 "panic phase."
How much longer? Just as importantly, how much more severe could it be?