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Here’s What Happens If That Pattern Continues
Take a quick look at these two charts of the S&P 500 Index, taken from 2 different periods in history, and answer this question: what is similar about them?
If you said to yourself, “everything” I think you would be very close! As an investor who leans heavily on technical analysis (charting) as part of the portfolio decision-making process , I can’t help but notice when the current market resembles a past period. In recent months, I have seen similarities to a few different bear markets from the last 50 years, but the one that keeps coming back into the picture…pardon the pun…is the period that started the busting of the Dot-Com Bubble.
I won’t overwhelm you with detail, but what I see is a gradual pattern of lower lows and lower highs that occur at about the same points in each chart. The magnitude of the drops and subsequent rallies is similar, and it does appear that the market tries vainly in each case to climb back and truly recover from what in each case was about a 20% drop from the peak value to the bottom of the trading range.The key difference in the chart is the most important point of this article: the top chart shows the S&P 500 during the period from October 2000 through early 2001. The chart immediately below it shows the S&P 500 from October 2018 through early 2019. And while I don’t expect you to see it as vividly as I do, as someone who has literally viewed millions of stock charts over the past 38 years, I see a growing possibility that the U.S. stock market is mimicking the pattern of 18 years ago.Sure, the environment is different, the markets are influenced by many modern factors, and we are all 18 years older than we were then. But as they say, history doesn’t repeat, but it does rhyme. And this one rhymes like a hit song.But what does that mean for the future? See the chart below, which shows you how the subsequent few months played out. This chart is that same one from above that started in October 2000, but extended out to the end of March 2001.
18 years ago, the market sprinted up quickly to start the year, and after a brief pullback, ended January with a strong gain. Following a year (2000) in which the S&P 500 dropped over 9%, its first losing year in a decade (1990 was the previous one), this probably left investors relieved.But February was a rude reversion to the bear market cycle that had started the previous quarter. In fact, by late March, a mere 7 weeks later, the S&P 500 had dropped over 20% from that late January level. This brought its decline from the year 2000 peak to just about 25%.As 2001 continued, the market continued a series of brief, sharp rallies, each of which was followed by a drop to lower lows. Of course, there was the tragedy of September 11 of that year, and 2001 saw the S&P 500 finish lower for the second straight year. In 2002, a series of events pushed the S&P 500 to its first-ever 3-year losing streak, and the index was off over 45% from its year-2000 high by the time the ultimate bottom was reached in March of 2003.Related: The S&P 500 May Be About To Disappoint A Generation Of InvestorsI am not in the business of forecasting precise events or market levels. But what I do focus time on is evaluating potential for major losses in different segments of the global financial markets. What I see today is a double-edged sword. There is potential for furious rallies as well as continued sharp declines in value. This is particularly the case for the S&P 500 Index, which has been on the investment version of steroids the past couple of years, thanks in large part to a lot of self-fulfilling prophesies of investors who have crowded into index funds with blind faith and tremendous complacency.That is very similar to the environment I recall from early 2001. The prior year ended with a court battle over politics (can you imagine that?), as the outcome of the November 2000 U.S. Presidential election was not finalized until over a month later. As 2001 began, the economic expansion of the previous decade was peaking, tech stocks were getting hit hard, corporate profits declined and businesses cut spending. These are all top-of-mind concerns of investors as 2019 began. In early 2001, the U.S. Federal Reserve lowered interest rates by a half a percent. As the above charts showed, that helped for a little while, then the downturn resumed.And before you try to explain that today’s market is cheered by an unemployment rate of below 4%, I will note that in 2000, the rate hit 3.9%, a 30-year low at the time. The dollar was strong then as it is now. OK, that’s enough, I think you get the point: both the charts and the market environment are strikingly similar to that of early 2001.This may mean nothing when we look back a year from now. Or, you can do what I do with this information: note it, remember it, and account for it among other possible reward and risk tradeoffs you consider as you plan your investment strategyfor this year and beyond. As is often the case, stock market analysis via the study of chart patterns alerts us to things that might otherwise take us by surprise. As the old expression goes, those who are ignorant of history are doomed to repeat it.Look sharp in 2019. Opportunities abound for the nimble.