Time constraints have kept me from blogging frequently in recent months. Today I will do some catching up by reviewing the long term scenarios and indications we have been covering.
Long term readers will remember my Dow 32000 series, which I started sharing in 2013: The case for Dow 32000. Many people declared me crazy, because the Dow was still below 15k and the internet was full with bubble and crash warnings. The Dow is now above 26k and the forecast doesn’t look all that crazy anymore. Meanwhile some of my colleagues are still peddling bubble and crash warnings. I am sure they will be right some day, just like you will inevitable be right eventually if you keep calling for rain on blue sky days. But investing is about making money, not about being right eventually.
So first off, here is the updated version of my long term monthly chart from December 2016 ( see: Dow 32000 revisited):
No need to change anything here. The market has kept rising along the dashed grey line as expected and ended 2017 right into the first pink target ellipse. The move may be near its end, but the odds for an extension into the second pink target ellipse (around autumn 2018) are going up. The reason is that real volatility has stayed so low, and normally you get higher volatility in the final stages of a big move (more on that below). If the S$P 500 goes on for another 8 months and gets in the 3000+ zone then the Dow will also be near to our 32000 mark. A drop below the grey dashed line would tell us the bull market since 2009 is probably over.
Some readers have been pointing out that my 88.4y cycle is due for its peak. That’s true, but a cycle that has been observed only a few times is hardly a hypothesis, not a very reliable indication. We will need a few thousand years of stock market history before we can tell if that cycle shows up with any regularity. Also a cycle of that length should not be expected to work perfect to the month. If the bull market peaks next September it would still be a good match for this 88.4y cycle.
The solar Saros 127 will revisit us in 2019. This Saros has marked both the 1929 crash and 2001 crash (and 9/11). See: The Saros cycle and the stock market. So, it is quite possible this bull market will stretch into 2019 under increasing volatility.
There are two reasons why the odds for another year of bull market are pretty good. As I wrote in February and March 2017, a dearth of 1% down days in the S&P 500 has historically been a bullish omen for the next 12 months. Very low volatility tends to mark the middle of big moves, not the end of them. See: We got a 1% down day, what next? A 109 day period without 1% down days had just ended, but we are already in a new one, now at 107 days and counting. So here is the updated list:
Once the current series without 1% down days ends we can expect the market to climb an average 14.8% over the ensuing year (if historic tendency keeps up). That would mean S&P 500 well above 3000 in early 2019.
We are also on an extremely long streak without 2% down week, as explained in this article from last July: Why the VIX is so low and why you shouldn’t worry about it yet. We still haven’t seen a 2% down week since I wrote that article and the current streak is up to 71 weeks. We have to go back to the roaring and 50s and 60s to find longer periods of “painless investing”. Here is the updated list:
Twenty more weeks and we would break the record from 1959. More important is what happens after the first 2% down weeks that comes. It will panic investors for sure. But again the historic average shows us that the market tends to rise another 10% in the 12 months after that first 2% down week that ends a long period of “painless investing”.
So, that’s where we stand right now. Could it be that historic tendencies will fail here and the market will suddenly crash without giving any advance warning in the form of increasing volatility? Of course, that could happen. Nothing can be ruled out. Just know that the odds are not in favor of it, if history is any indication. That’s also why VIX stays so low. Once we start getting more 1% down days and more 2% down weeks we will know that volatility is increasing and then I would expect the VIX to go up even though the S&P 500 may still be setting new all time highs. That would be a clear indication that the bull market is on its last legs. Until then I would just go along with the flow, with normal levels of caution.
The case for a 2019 stock market peak
Posted by Danny on October 29, 2018
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.
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Posted in Market Commentary | Tagged: 2019, Dow 32000, Solar Saros 127 | 7 Comments »