LunaticTrader

Investing with the Moon

Remembering 1994

Posted by Danny on April 4, 2016

Stocks made another push higher last week and the S&P 500 has now recovered all its losses since the start of the year. Can it go higher? Why not? Can it go much higher? More on that further on in this post, let’s first have a look at the chart:

^SP500 (Daily)  6_25_2014 - 4_1_2016

The S&P is back to levels last seen in late December. And it is also back to the obvious overhead resistance zone 2050-2130, which has kept the market in check throughout 2015. Will it stop the market again? My Earl2 indicator (orange line) has finally turned down, suggesting a pullback or correction is in the pipeline indeed. But the faster Earl (blue line) has just made a shallow bottom and is turning up. This suggests the market wants to go higher first. When there are mixed signals it is usually the faster Earl that pans out first. We are in a lunar green period, so a test of the November high is possible this week. I will keep an eye on my daily reversal levels for clues when a top may be in.

Most investors probably expect at least a good pullback at this point and that’s a reasonable scenario. But what if the market just forges ahead and climbs above 2150 without looking back? That would be shocking for many. Yet, it has happened before.
I started investing in 1986 and within one year I got caught in the ’87 crash. The media was full of comparisons with the 1929 crash and that made me very cautious, which helped me to miss out on most of the subsequent recovery. This stock investing sure didn’t look like an easy road to riches anymore. The first Gulf war in 1990 introduced another bout of caution in the stock markets, but not for long. By 1994 stocks were more than 30% above the levels from which they had just crashed 7 years before. All the newsletters I was reading were very bearish, so I bought put options, convinced that another crash was coming. And things went my way very soon, as there was a significant pullback in March. I didn’t want to sell too early, and the financial media had become even more bearish, so I held on hoping for much bigger gains when the inevitable crash came. But, of course, by summer stocks had gradually recovered for no good reason at all. I sold my put options in disgust, taking a loss on them, and was lucky to do so because the stock market was to double in the next 18 months.
The recent price action in the market as well as the current mood are reminding me of that time. Once again the market crashed and recovered. Once again the market has climbed 30% above the pre-crash highs, convincing many investors that another crash must be due. Once again investors’ mood has become depressed, even though the market is not far from new all time highs. And the price action has been very similar:

1994-2016

Does that mean it will continue the same? No, it doesn’t. Similar price patterns always break down sooner or later, we just don’t know when. In late 1994 stocks broke out to the upside and there would be no pullback worth talking about for more than a year. Innovation drove the market higher and it would take another 5 years to reach a major peak.
Innovation is still accelerating, so could we be in for a repeat performance? I don’t know, but I can’t rule it out because it has happened before.

10 Responses to “Remembering 1994”

  1. despe906 said

    I like to read about traders’ experiences. My first year -2003 was disastrous. I was smart enough to negate analysts (I kept saying – if they know the market so well, why they write articles in newspaper instead of playing themselves?) smart enough to go against the sentiment, to ignore the technical analysis, but I lost all my money anyway. I was ahead in trading shares and had moderate losses trading futures. But after 8 months or so my frustration was growing because I had planned to have significant profits by then. The market kept going up so my plan in September was to ‘pyramide’ till certain level of the stock index (that idea came to me naturally, I hadn’t read about it anywhere) and soon my account was in positive territory…but the market never reached my level. It turned down and I lost most of my pyramide profits. At that point I was angry and my next decision was a classic emotional mistake: I bought call and put options, investing all my money (overtrading) betting on the market to go somewhere, anywhere. Unfortunately, the market was undergoing a correction and the price range was contracting, so my options expired worthless right in the middle of my ‘long strangle’.
    This is an old story. But I find it interesting. I wasn’t stupid, I would say I knew the ‘game’ better than all those talking heads in the media or many many newbies I met later, but I lost it anyway. I was on the right track but made mistakes : ovetrading, having inflexible profit and price targets. The main take-away for me was the discovery that the market not only goes up or down or sideways, but also the change in volatility can make the moves steeper and flat markets even narrower.

    • Danny said

      Great story. I guess we all need some rough patches to become better investors. This anger when the market didn’t go your way is something most traders experience sooner or later (and probably sooner).
      In many ways our earlier experiences, and especially our earlier painful losses, determine how we approach the market later on in life. In my case, having been in the 87 crash in my first year kept me looking for another crash for the next 10 years. And of course it didn’t come, just the opposite happened. A crash did come after the year 2000, but I would have made more money in the 1990s if I hadn’t been so focused on spotting the next crash.

      • despe906 said

        Traders have no sufficient knowledge as to why they lost, therefore the impact of early painful experiences can have both positive and negative effects. For example traders who lost trading penny stocks may avoid later those instruments. Those who overtraded will guard themselves against it and will maintain an even stake like it was the most important rule ever. But also their conclusions may be wrong : for example “I lost because I didn’t follow any trading guru”. Traders need time to rectify their approach, as their awareness grows in time. Your immediate reaction was to look for a market crash, but also in time I reckon you recognized the mistake of following the financial media. Also, despite evolutions, something remains : you have been an “investing trader” from the beginning. I am a price action short term trader -so I was in 2003.

      • Danny said

        Yes. Everybody’s learning “path” is different and our individual character setup will also determine what type of trading/investing style we eventually gravitate to.

  2. Valley said

    Great Post, Danny. You have been an unpaid (tho’ much valued) mentor over the years. I have read all of your posts and archives going back decade and have mentioned your work in various forums. Keep up the good (great) work!

    • Danny said

      Thanks for the thumbs up, Valley. It’s good to hear from long term readers once in a while. And appreciate the mentions.
      Personally, I have benefited a lot from the writing, because trying to write a weekly piece about the market forces me to focus better, to organize my thoughts and hunches, and sometimes to look for that different angle that other writers may have missed. And together with the occasional responses from readers it makes the market more alive for me. I wouldn’t have that kind of “contact” if I was just doing my trading without telling anybody.

  3. mike said

    I remember the four pillars finance 2013 the yearly prediction did not pan out I recall it initially predicting a flat to -10.00% down yr. In 1994 I got scammed duped lost over 5 figures in hcca (maurice w furlong) it was 100% loss an american greed type scam with fake 0 assets & 100% fake press releases. P.S. 1994 wasn’t my worst loss but the most crooked. I had my health & elbow back then.

    I heard on news few weeks ago chinese stock market down -11% in 1 day. I believe usa has circuit breakers to prevent prop market up I can’t remember more than 3% down in day all the overseas money must be flowing into usa.

  4. TW said

    nice analog danny !

    if we make a new high, what is your target on spx? (price and timewise)

    • Danny said

      That’s hard to tell. But given the long sideways pattern that now stretches over 2 years for the S&P, a breakout to new highs (if not a false breakout that reverses instantly) would normally lead to a sizable move over at least 18 months, but possibly much longer.
      Target would become 2350+ , again with much higher targets possible if the move goes much longer than 18 months.
      In that case I will just ride out the move using my reversal levels, without focusing too much on price or time targets. That’s usually the best approach.

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