As outlined in this week’s video, 1998, 2002, 2009, 2011, and 2016 all featured sharp S&P 500 drops followed by relatively rare and rapid shifts in market breadth. The 2018-2019 chart also features a significant S&P 500 decline and a relatively rare and rapid bullish shift in market breadth.
After a volatile 2018, it is easy to understand the “major stock market top” case; it is a bit more difficult to emotionally respect the S&P 500 may be consolidating/giving back some gains prior to making a push higher. The 2019 chart shows a sharp decline, rally off a low, a failed breakout, and a pullback.
The 2011 case featured a decline that stopped just short of 20%, followed by a rally off the low that included a rare and rapid shift in market breadth. We can see some similarities between the 2010-2012 chart below and the 2018-2019 chart above.
Following the 2012 failed breakout and 9.94% correction, the bullish trend resumed and stocks pushed significantly higher.
Does long-term consolidation, including multiple failed attempts at new highs, always equate to a major topping pattern? Based on the 2014-2016 case below, the answer is no.
After the frustrating period of gains and givebacks, the bull market resumed in a satisfying manner.
In 1998, the S&P 500 plunged just under 20%, similar to 2018, rallied sharply off the low, and then experienced a 4.29% pullback.
After failing to hold the breakout to new all-time highs, the market found its footing and tacked on some impressive gains.
The 2002 case featured months of consolidation and a 4.57% giveback near a logical area of resistance.
After the consolidation period and the 4.57% pullback, the S&P 500 rallied for several more years before peaking in October 2007.
The 2009 case featured a false breakout near a logical area of possible resistance and a 7.09% drop.
After the period of consolidation/failed breakout, the S&P 500 reestablished the bullish trend that began after the March 2009 low.
The cases above were not randomly selected; each period featured measurable events that were similar to events that recently occurred in 2019 (details are covered in the video). In each of the similar historical cases, the S&P 500 had trouble clearing a logical area of possible resistance. After failing near resistance, the market pulled back between 4.29% and 9.94%. The current S&P 500 correction increased to 4.87% after Monday’s decline. Thus far, the current pullback does not look abnormal relative to the similar historical cases.
Every 4-10% pullback in stock market history was associated with some type of fundamental concern(s). Thus, present day concerns about the economy and trade war do not put 2019 into unique territory. At a similar stage of the 2015-2016 bottoming process, the S&P 500 futures went limit down, which basically equates to maximum fear. It is easy to comprehend how bad trade war news could cause a similar mini-panic in the stock market in 2019.
Unless the market gets some encouraging trade/economic/Fed news, it is likely to at least test the small gap mentioned in the tweet below.
To date, the model has shown very little in the way of meaningful deteriorationand the market has not done anything out of the ordinary. It is very difficult to label the current 4.87% correction as out of the ordinary, especially after a sharp multi-month rally. Given the data and news cycle are subject to change in the coming days and weeks, we will continue to take it day by day, respecting the possibility of a major stock market top.
This post is written for clients of Ciovacco Capital Management and describes our approach in generic terms. It is provided to assist clients with basic concepts, rather than specific strategies or levels. The same terms of use disclaimers used in our weekly videos apply to all Short Takes posts and tweets on the CCM Twitter Feed, including the text and images above.
