The case for a 2019 stock market peak

Today I will take a look at some longer term scenarios I have been sharing on this blog. It’s good to take a new look at the bigger picture at least once a year.

Back in 2013 I started drawing parallels between the current decade and the roaring 1920s. While that looked farfetched back then, here we are.
I also kept updating my Dow 32000 scenarios. That has panned out quite nicely too, even though the highest Dow target has not been reached (yet).
In my latest update a year ago I explained why a one year extension to the bull market was becoming likely because of continued low volatility. This worked out as well with the S&P 500 reaching a record high in late September. I have updated my prediction chart with latest price action and this shows where we are right now:

My price target circles have done a good job and the Earl2 is at the verge of turning down. This suggests that the peak may be in, and a bear market is starting. But as long as the 9 year uptrend channel holds up we cannot rule out another rally to new records next year.

Long term bull markets have a habit of continuing much longer than most investors consider possible, and that could be the case again. Solar Saros 127 will be giving us a visit in July 2019, and while I would never make solar eclipses my sole consideration, traders will certainly remember 1929 and 2001, when we also had a pass of Solar Saros 127. Just like in the 20s we may be due for an important peak in the “9” year. Studying the late 1920s price action may give some useful clues.

When a market bounces back in a v-shaped recovery from a major low like 2009, then the rate of change will reset to more sustainable rates a couple of times. Trendlines cannot be kept up and a pullback or correction resets them to become less steep. In the S&P 500 there have been three such resets: early 2010, late 2011 and 2015. Is easy to see in this chart:

After each reset the market has continued its climb along the new, less steep, trend. This year’s October drop is not even a reset yet, it has just brought it back to current trend. It will be very important to see if the 2550-2600 support holds up. Zooming in to a weekly chart we see this:

The early 2018 correction broke a 2 year uptrend line. But the market has then recovered to new highs, suggesting the market is still bullish. As it now stands we still have higher highs and higher lows. It would take a drop below the February low to change that.
Something very similar happened in the final year of the 1920s advance:

After a peak in early February there was a sharp +10% correction that broke the going uptrend line. A subsequent rebound saw the market rise to new highs a few % above the previous peak. That was followed by another sharp +10% decline, but no new lows for the year. Traders turned bearish, thinking the market had clearly peaked, but instead a final 20% rally started from that point.

We have seen very similar price action in the S&P this year. That doesn’t mean it has to continue in the same way. But I would keep this scenario in mind as long as the market doesn’t break to new lows for the year. Most investors seem to be rather pessimistic right now. A quick advance to new records is probably the least expected scenario. That’s why I would give it a 50% chance at the moment.

Good luck.