Wednesday, March 05, 2014

The Market Tends to Repeat Itself - Part 2

By Dr Van Tharp Trading Education Institute and Training Workshops

Click Here to Read Part 1

“the vintage of history is forever repeating ~ same old vines, same old wines” — E. A. Bucchianeri, author

Last week, we dug into the market analog chart that was designed to show similarities between current markets and the price activity that lead to the 1929 crash. Since then, the broader market (S&P 500) has made a new all-time high, but the Dow Industrials are the lagging major U.S. index and are the best it could do on Monday (2/25) was get to within 233 points of its all-time high.

When we dug into those 1929 parallels based on the recently popularized chart, we put them in the interesting-but-a-bit-too-contrived category. This week, we’ll take a look at four other market analog charts and see if they can help us draw some conclusions about the state of our current bull run in U.S. equities.

Market Year Analogs — A Useful Approach

When discussing market analogs in our last article, I mentioned that there were both good and bad representations of that analysis approach. As I said last week, “The biggest problem with market analogs is that you can use any price scale and any starting point to make two curves fit each other. Put a couple of clever people in a room for a day, and they can come up with dozens.” So that gives us the prescription for the wrong way of creating market analogs. Let’s instead look at some analogs that follow a more useful approach.

These analogs are excellent resources from the folks at You’ll notice that they use very consistent protocols — they connect market lows and index both time periods 100 at the starting point. The first analog compares the run we’ve had from the market bottom in March 2009 to the explosive move made coming out of the 1932 market low culminating with a top in 1937:

The up move in the 1930’s was more volatile and much stronger than today’s current drive up, however, the current move is already 10 weeks longer than the analog. Another similarity in these two markets is the state of economic activity — the 1930’s had a very troubled recovery economically while the markets plowed ahead only to drop precipitously. Many would claim that similar recovery problems exist during our current bull market…

Now, let’s contrast the current market with the early 1960s:

Note that this chart is drawn from the low that occurred in October 2011 after the S&P debt downgrade of the U.S. and the concurrent European debt crisis. Based on this analog (which is strikingly similar in the rate and magnitude of price movement to date), our current run could carry on much longer.

Now we’ll look at the analog that Paul Tudor Jones used in 1987:

This is another analog that has some meaningful information in the duration and magnitude of price movement. A major difference in 1987 was the blow-off top the market made heading into its drop. Of course we could still get that kind of market pressure from here as well.

Lastly, let’s compare the current market to the action after the internet bubble burst:

The recent nature of the 2002—2007 bull market makes it a good one to study. We can see that the current market rise has been much steeper and more volatile that the quiet steady bull run that ended in 2007. Duration-wise, we’ve almost run the course relative to the last big bull market.

So what can we conclude from these market analogs? First of all, by most accounts this bull market has had a long run and we are certainly due for a more serious correction. The market effects of Quantitative Easing, however, are a wildcard in almost any sort of analysis. While we should be on guard for an inevitable pullback, taking money out of the market prematurely has not worked for several years. Continue to honor your stop loss points and stay the course until price tells you otherwise.

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