Once Upon A Time In America

“And every stop is neatly planned.” – Homeward Bound, Simon & Garfunkel

“I think we are actually at a point of encouraging risk-taking and that should give us pause. Investors really do understand now that we will be there to prevent serious losses.” – Jerome Powell, October 2012

Is it 1929 or 1987?

Once upon a time in America, there was a stock market.

The whole point of markets is to reflect reality.

However, government intervention has TRIED to distort price discovery 3 times this century:

After the Technology Bubble Top in the NAZ in 2000, the housing crisis in 2008, and now.

I say tried to distort because despite their persistence, Mr. Market has done a remarkable job of adhering to cycles.

To wit, the 90 year crash cycle and the 20 year cycle have exerted their influence decisively.

The 90 Year Cycle topped near the end of 1929.

The 20 year cycle saw the DJIA top in mid-January 2000.

Interestingly, the SPX topped on March 24, 2000.

This year, a low on March 23 perpetuated a powerful rally.

Charts tell a story, albeit a story that few people listen to.

Sure traders look at charts, but the vast majority look only at the recent action presented in daily charts.

Few look at historical charts to see what can be gleaned.

Hang with me, I going to make it worth your while… with some long term charts.

I think there are two reasons why most speculators don’t look at historical charts:

1) They think that the only thing that matters is what’s happening now. They don’t buy the idea that there are cycles and that markets repeat. I have proved to my complete satisfaction over 35 years of trading and research that the events reoccur in patterns because human nature is cyclical.

2) They don’t know how to listen to the market.

Since last fall, I have been warning that the charts were telling an ominous story that few were aware of.

The story the charts told me allowed followers to not only avoid, but to prosper in the quickest 30% decline in history.

The only comparable events were the crashes of 1929 and 1987.

Someone on Twitter responded to an article I wrote, Calling the Crash of 2020, saying, “good for you, you predicted a pandemic.”

This is completely missing the point.

The point is that the news breaks with the cycles, not the other way around.

The coronavirus was simply the spark that lit the fuse.

So the only declines similar to what we saw this spring were the 1929 and 1987 crashes.

The aftermath of those crashes were completely different.

Obviously, the 1929 crash heralded The Great Depression.

1987 turned out to be a one and done, a market event, not an economic contraction.

The ’29, ’97, and 2020 waterfall declines are dissimilar to the other downturns in the last 1000 years.

Let’s take a look.

The May to November 2008 cascade during the Great Financial Crisis took 6 months.

The SPX shed 48.5%… nearly a perfectly symmetrical 50% drop.

Likewise, the drop from September 2000 to July 2002 was 49.3% (again virtually a perfected symmetrical 50% drop) which took 22 months.

Bear markets have a tendency to decline around 50%.

Similar to 1929, the 1987 panic saw a 36% decline.

While a new closing low was struck in early December 1987, the selling climax on Black Monday, October 19, essentially marked the low.

While the SPX set a new high in July 1989, another deep market slide took place into October 1990.

It was really only until February 1991, nearly four years after the ’87 crash, that the market was able to sustain new highs.

In contrast, it took 7 years from the March 2000 top for the SPX to strike a new high — and that was a brief, short-lived new high, a Pinocchio, that preceded a 17 month bear market into March 2009.

From the March 2009 low, it took 4 years until March 2013 for the SPX to clear its 2000-2007 double top.

For all intents and purposes, it took 13 years from the March 2000 Bubble Top for the SPX to make sustained new highs.

Interestingly, it was 13 years from the DJIA 1929 top to a major low in 1942 when a sustained uptrend started.

You think perhaps something can be gleaned from studying market cycles?

Above, I mentioned the drop into October 1990, three years after the October 1987 drop.

The 1987-1990 troughs proved to be an A B C decline which set the stage for a sustained bull run.

Similarly, the 2002 to 2009 lows marked an A B C pattern which set the stage for the longest bull run ever.

The bull case is a another A B C pattern is in play.

Allow me to explain. In this instance, the slide into December 2018 marks the A wave low with the top of the B wave being Jan/Feb 2020.

The implication is that the SPX is working on a C wave bottom.

While the idea of all-time new highs from here seems far-fetched and the short straw, we are in a tornado.

No one knows where the house will land.

Getting back to the aforesaid monthly SPX, notice that last month’s low saw the SPX test its trend channel from the 2009 low for the first time.

This trend channel is validated by a trendline connecting all the highs through January 2018, which marked the highest momentum reading in history.

I paralleled a trendline off the March 2009 low which as you can see was undercut in March.

Notice also the Megaphone or Broadening Top formation from 2018.

There are two takeaways from the Meg.

1) The implication is there is room to go for a perfected 3rd drive to the bottom of the Megaphone pattern into the 2030-2100 region. Interestingly, 2030 represents a 50% retrace of the entire bull.

2) The large overshoot above the Megaphone paves the wave for the potential for a synergistically symmetrical undercut below the Megaphone. Since the overshoot from the 3000 region was approximately 13%, a similar 13% undercut below the bottom of the Meg ties to the 1800 region and the early 2016 lows.

A ‘test/undercut’ of the March low could see the 2030-2140 region satisfied. This would also satisfy a test of the May 2015 high with prior resistance acting as new support.

Not surprisingly, the bounce off the lows came after a test of an 11 year trend channel.

That being said the SPX closed at a critical square-out (balance-out) point at 2790 on last weeks close.

This is the bull case.

The bear case indicates that no matter what kind of rebound plays out, the odds are the market will make new lows next year below whatever 2020’s lows are.

This is because the Yearly Swing Chart on the SPX & DJIA have turned down on trade below 2019’s low.

This occurred in 1929 as well and predicted lower lows in 1930 and 1931.

Importantly, the 1987 cascade did NOT turn the Yearly Swing Chart down. The drop did not take out the low of 1986.

The charts were talking.

The RUT also presents a bearish story.

A weekly RUT below shows that the RUT struck a high on the week of 1/13/20, exactly where a false breakout found a major high in the DJIA in January 1973… prior to a 2 year bear market.

I had been looking for the market to top in mid-January based on this 1973 pattern.

The market pushed somewhat higher, but the RUT is the Truth Teller and its structure is often much clearer and cleaner than that of the SPX.

As the pattern stands currently, the RUT suggests a bearish resolution with lower lows into 2021-2022.

Conclusion. Investors who think the worst is over should prepare for another shoe or two or three to drop.

While we got a sharp rally with the SPX carving out a 50% retrace, there has never been a case where an intial drop of 30% did not take at least another six months to bottom.

Bulls who never met a dip that could not be bought are going to be disappointed according to history.

Likewise, in bear markets, stocks tend to fall by as much as earnings.

Let’s assume that S&P companies see their bottom line cut in half over the balance of 2020.

At the moment, this is a conservative estimate.

If so, the SPX should ultimately drop to at least 1800.