Valid Concern About Market's Rapid Ascent
The following logical question was posed on Twitter this morning:
The short answer is "yes, it is a relevant concern looking out days/weeks." However,
it is also worth taking a look at some historical examples. History helps us
keep an open mind about all outcomes (bullish and bearish). Therefore, in today's
post, we will answer one question and one question only:
Is The Distance Between The S&P 500 And Its 50-Day A Showstopper?
White Space Between Price And 50-Day
The S&P 500 broke above its 50-day moving average 28 calendar days ago.
Since then, it has risen at a rapid pace, leaving the 50-day in the rearview
mirror. The 2015 market has three characteristics that allow for a historical
comparison:
- A waterfall plunge in August.
- A double bottom (more
details).
- A bullish reversal in the 50-day's slope.
Can We Find A Similar Historical Example?
The answer to the question above is "yes". In 1998, the market had a waterfall
plunge, a double bottom, and quite a bit of white space between a rising 50-day
moving average and the S&P 500 (price).
The charts below are not a commentary on 2015, nor is it a comparison of 1998
and 2015. Remember, the purpose of the exercise was to answer one question.
We understand "1998 was different". That argument applies to all historical
references made about the economy and markets. No two periods in human history
are alike.
What Happened Next In 1998?
In 1998, rather than "filling the white space" and returning to the 50-day
moving average, the S&P 500 rallied for several months in 1998 before revisiting
the 50-day in February 1999.
1998: Did The Rally End Near The 50-Day?
The answer to the question above is "no", stocks continued to rally until
July 1999. Notice during the latter stages of the rally price did tend to congregate
around the 50-day moving average.
1998: Did Overhead Supply Kill The Rally?
Overhead supply was and still is a concern in 2015. As we outlined in this
October 9 video
clip, like the white space issued covered above, overhead supply is not
necessarily a showstopper either. The market was able to overcome three pockets
of overhead supply in 1998.
Can We Find Another Historical Example?
Many may remember the feeling that "the market has to pull back" in the early
stages of the March 2009 rally. The market did not comply, failing to revisit
the 50-day moving average for 91 calendar days. Keep in mind, we are at day
28 in 2015.
But 2015 Is Laced With Problems, Right?
Yes, that is a fair argument, one that was made in 1998 and 2009 as well.
Is there any evidence that supports the possibility of a 1998-like rally in
stocks? Yes, the following links will take you to dated pieces of evidence
that tell us to keep an open mind about better than expected outcomes in 2015:
- Key reversal bullet points - October
2, 2015.
- Breadth thrust - October
9, 2015.
- DeMark trend signals (TDST) - October
16, 2015.
- Runaway gaps - October 23,
2015.
- Gaps held on bad news - October
30, 2015.
How Can This Help Us?
If you feel very skeptical about the possibility of a continued rally in stocks
and have felt skeptical since the October 2 intraday reversal, that is common
near turning points. The purpose of this analysis is not to predict anything,
but rather to help us keep an open mind about both better than expected outcomes
and worse than expected outcomes. The charts, price, and hard data will guide
us if we are willing to listen with a flexible, unbiased, and open mind. As
you look at the 1998 chart below, keep in mind we have a waterfall decline
in 2015, a double bottom, overhead supply concerns, and a sharp rally.
