NOTE FROM TIM: I'll be doing a video post later today….because…….what a day it was! I extend my thanks, as always, to the various contributing writers to Slope; their work is much appreciated by me and the readers here.
It's late summer 1998. Harry Stamper and his ragtag crew (below) have just saved the world from an asteroid impact on the big screen. Steven Tyler 'Don't Wanna Miss a Thing', and the iMac has made a comeback in an assortment of lollipop flavors. I am stationed at the then Pacific Coast Exchange, witnessing a real life end of the world tale unfold. Sovereign debt stress (then in Asia and Russia) has created a maelstrom that will soon result in the take-down of Long Term Capital Management. In what will become the norm in the following decade, the Fed gets cozy with Wall Street to contain the damage and creates an unofficial instrument that will come to be known as the "Greenspan put."
This all played out in the stock market on the following chart:
A summer swoon (A), impressive September rebound (B), and an October break of the summer low that quickly reversed (C). The rally that ensued (D) travelled 19% off the low in just a few weeks. In spite of being "short-term overbought" by Halloween, the S&P hardly paused for another month and added roughly 11% more by year-end. Look at all familiar?
I'm not the first one to notice that the charts are looking more like 1998 than 2008 as so many had recently assumed. If we had nothing else to go on, you'd almost have to conclude that the market has considerable upside from here. In fact, this possibility has to be respected technically. While the resistance near 1275 looks more formidable than what had been cleared by now in '98, we cannot rule out a total grab-fest to finish the year. I think this outcome is less likely than it appears, however, as the differences go beyond charting analogs:
1) The Fed (and now the Europeans!) are interested in goosing asset prices, but in 1998 they were feared by bears. While not powerless today, people will not continue to buy stocks because central banks are suddenly on their side.
2) In 1998 we were still in a bull market, and we had the grand finale on deck. Yes stocks are cheaper today, but we're mired in a secular bear that tends to wake up and terminate strong rallies when you least expect it.
3) The evidence points to a coming recession and another "too far above trend" peak in the earnings cycle. Forget this 40% nonsense. We're not going to get the confirmation from the data that this summer was just a speed bump in the ongoing recovery.
No, what we've got is an oversold bounce turned into a short-squeeze turned into a performance chase. This can keep feeding on itself and continue into New Year's, but I wouldn't be betting on it because of the similarities to 1998. Unless of course Bruce Willis gets involved.
by Brian Thomas for varsityinvestor.com