By: Jeff Cooper
Hit and Run Morning Stock Report: October 28th, 2022
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The Analogue
Earlier this week we showed the analog from 2008 and the weekly positive divergence then and in 2022.
Let’s take another look.
The charts below are weekly charts of the SPX cash index.
The red line through each cart is a 50-week moving average.
The white lines in the charts are to make it easier to see the price patterns of each chart.
Note where the red line comes through points 1 and 2 on each chart.
Note how it touches point 6 in each chart.
Look how similar the pattern is at points 1-5 on each chart and on lines 5 and 7 on each chart.
This is uncanny and about as good an analog as you will ever see.
The chart below shows 2008 after point 7. In 2008, the market rallied for 4 weeks after the low (red arrow).
From that point, it consolidated for a couple of weeks and then crashed lower where 50% was lost from after the red arrow to the blue up arrow in March of 2009.
In 2008 from the point 7 low, the market rallied from 1200 to 1313, a 9.43% move over 4 weeks.
Currently, the SPX has rallied from 3491 to this week's high of 3886, a gain of 11.3%.
So the market has already rallied more than in 2008 in less time.
What does this mean?
We have to remember that it is an analog which means that the price action is similar, not exact.
Further, it is similar until it isn’t. Those are the rules: it is a great roadmap until it isn’t.
At this point, the “time factor” says we probably have 3 weeks to wait IF the market is going to follow 2008 “precisely” and slam to the downside.
The “price factor” says we have already exceeded 2008’s rally and the wheels could come off at any time.
Feelin’ lucky?
In sum, there is a likelihood of expecting a large reaction to the downside.
We know from a Long Wave cycle perspective that a correction from the excesses of many decades is overdue.
It is important to keep the 2008 analog in mind, but be open to an alternate scenario.
If the market is going to crash, I would not have thought that it would be above the June low after the collapse of the META and AMZN, and MSFT.
However, money managers are not paid to sit in cash. They are paid to deploy funds.
Hence, the bull markets are in many value stocks like MRK and oils like SLB.
Is this like the shifting of chairs on the deck of the Titanic?
If the analog is to play out with a plunge in November, then it will have to do with big money exiting their value winners.
If they unravel and it looks as if there is no place to run and no place to hide then perhaps we will see the panic and capitulation in the indices (versus one stock at a time) that has been so elusive.