Diary of a Financier

Null hypothesis: SPX 1998 analogue

In Capital Markets on Fri 30 Aug 2013 at 15:30

I’m always on the lookout for data to support my null hypothesis. Right now, my ever-evolving alternative hypothesis (my “thesis”) still leans toward intermediate term bullishness. But, here’s some food-for-though going into this weekend…

Cue Ralph Acampora, the godfather of technical analysis and an early bull who came out with conviction-enough to declare this a new, secular bull market 4 years ago. He doubled-down on that call in 2012 too. While maintaining that secular bull call, Mr. Acampora recently warned of an imminent, cyclical bear market:

“The last time I saw a set up like this was in August 1998,” Mr. Acampora said.

From mid-July 1998 through late-August 1998, the Dow fell 19% as worries over an economic crisis brewing in emerging Asian countries and the meltdown in Russian financial markets spread to Wall Street.

More recently, emerging markets have been in relative freefall this year amid worries over a slowdown in China and prospects of reduced liquidity measures by global central banks. The iShares MSCI Emerging Markets exchange traded fund as lost 15% so far this year, while the S&P 500 has gained 15%.

Mr. Acampora thinks that the Dow could fall more now than it did in 1998. He recently lowered his Dow target to 12,000, which would represent a 23% decline from the Aug. 2 all-time closing high of 15658.36. Technicians say a decline of 20% or more defines a bear market…

Given all the uncertainty surrounding the emerging markets, Middle East tensions, monetary policy and seasonality–September has historically been the weakest month of the year–investors who have made a lot of money since the bull market started should book some profits while they wait for a better opportunity to start buying again…

“I’m still a long-term bull. We’re in an environment of a long-term secular bull market, that could last two decades,” Mr. Acampora said. “I’m just worried about the next few months.”

In terms of mouthfeel, we can anecdotally and quantitatively compare 1998 and 2013. For example, both exhibit persistently easy monetary policy, which both cases manifest in pockets like Commercial Real Estate (CRE) froth.

To wit, I’ve been tracking the SPX 1998 analogue on my charts for about 2 months. For the first time, I’ll now present the comparison here in my diary. Due to their inclusion of volume data (e.g. MFI), S&P 500 Futures ($SP_F) best illustrate the comparison:

SP analogue- 1998 v 2013 weekly

SP analogue- 1998 v 2013 weekly

SP analogue- 1998 v 2013 daily

SP analogue- 1998 v 2013 daily

The analogues displayed above are looser than my past guides. Although the past 6-9 months of these series are a compelling fit, the 2009-13 market shows incessant timidity with corrections that just didn’t exist from 1994-98. Further, the best-fit daily fractal is concave in 2013, whereas it was convex in ’98.

I watch and compare longer-term price curves across all fractals than most other technicians, because (in this case) I like to see a full progression along the Investors Cycle of Psychology manifest. Plus, my holding periods are longer-term than any traders’. This analogue doesn’t pass my smell test, because exuberance of any scale doesn’t appear in the behavior of daily and weekly fractals.

There’s still the “compelling fit” of the shorter term (6-9 month) data shared by 2013 and 1998. Price-wise, SPX will have to catch-down to 1998’s precedent in two weeks were I to continue following this set.

My mind wants to refute this null hypothesis. I can contrast that with a number of 1982 analogue sightings, which themselves suggest that we’re in the early stages of an unabated secular bull. More importantly to me, SPY is closing this week near the low point of a -5% drawdown. Risk markets are discounting the grey swans out there, including a strike on Syria, September tapering, and a debt ceiling debate. I’m reminded of what Howard Marks (Oaktree Capital) recently declared:

“[In terms of the stock market,] there are lots of risks out there today & everybody is pretty conscious of them.”

…Hash-tag “known-unknowns.”

This is the precise dualism I’ll be investigating this weekend…

–Romeo

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