Friday, March 23, 2012

1987 vs 2000 vs 2012 - over 100% bull market rally then crash / correction

Its been 3 years since global stock markets have rallied since the low that they made,in a synchronized manner, on 9 Mar 2009.
US S&P 500 has rallied +107% - from low of 683 in 9 Mar 2009 on to intraday high of 1413 made on 19 Mar 2012. From Oct 2011 low, S&P is now up ~ +30%.
Summary - Looking back in history,we have very few instances of such +100% rally in just 3 years.Going back to 1980,we can find just two similar instances in 1984-1987 and year 1997- 2000. And in both these instances ,we have seen corrections of at least -25% to -38% with minimum retracements of 50%. Going by these instances, this year -in 2012, S&P 500 could test 1000-1050 i.e could see a -26% correction.Charts below.
Time Period for chart study -
First time period - 1984 to 1987 -I have tried to compare this rally with the 1984 -1987 bull market rally of similar duration (3 years) and magnitude. ( ~100 % rally) and then examine the bear market corrections. We all know what happened in Oct 1987 then. Black Monday ,single day crash of 22%.
Second comparison is with the 1997 to 2000 ~+100% bull market  rally I`m not giving any conclusion / predicting here. Please draw your own.
In the charts below,added a 40 week MA ~ = 200 DMA (exponential).

1984 to 1987 vs 2009 to 2012
We can clearly see the 1987 bull market rally of 104% saw just 2 minor corrections of -9% and -6%.The 40 week MA always saw support.
The recent 2009 -2012 bull market rally is more choppy punctuated with more corrections -2 minor ones of -7% and 2 bigger ones of -16% :- first in Apr`10 -Jun`10 on Euro zone debt crisis, second -16% correction after US AAA rating cut in July`11-Aug`11. But even after three years and 107% rally in S&P,we have never seen a bear market correction of more than 20%. 
It should be noted that from Oct / Nov 2011 lows, S&P 500 has now rallied ~ +30% on very low volatility.So bulls should be ready for a ~7-10% correction at any time. (In same period,Hang Seng Index has rallied by +33%, DAX by +40% and Brazil Bovespa Index by +39% - with no meaningful correction so far).

Again this doesn't mean its time to go for aggressive shorts. Rather I would say ,~70% of global macro indicators that I track are still bullish / sideways. Risk indicators such as AUD/ USD,Copper are in yellow mode (AUDUSD at 200 DMA, Copper after +33% rally,struggling to make new highs and down (-5%) from 1 month high). Copper has good correlation with market tops and consequent reversals. S&P 500 top of 1560 `s made in Sep 2000 and Oct 2007.Next 2 -3 months saw Copper fall ~( -10%)  in year 2000 and (-20%) in 2007.
Here is an Interactive Correlation between S&P 500 and AUDUSD.
Click to zoom the charts on 1987 vs 2012 below.

Now lets see what happened after the Aug 1987 peak. The steep -33% correction was over in just 2 months.(21 Aug 1987 high of 336 to low of 224 reached on 4 Dec 1987.). And it marked the final low and the next bull market started by next year)
The 1987 correction saw retracement of 50% . i.e 50% of the point gains during the bull market rally were lost to reach a bottom.
1997to 200 vs 2009 to 2012
The next instance of similar rally in time and order i.e up 100% in ~3 years , in most recent times is -1997 to 2000 dot com rally and crash.
This rally was slightly longer in terms of duration ~3.5 years but very similar in magnitude 107% rally from S&P 500 low of 737 in early 1997 to peak of 1527 in Mar 2000 and Sep 2000 (double top in both months).
What happened after that is S&P 500 initially gave a correction of 26% over next 7 months to reach 1128 or 50% retracement in Apr 2001. It then rallied +15% to 1292 then fell another -38% over next 16 months to bottom at 800. First retracement of 50% in 4 Oct 2002.(i.e final retracement of ~100% of rally from 1997 to 200 at the final low in 2002)
Chart below.
 And the charts below

Going by these instances, this time in 2012 , after seeing +100% rally , we could see a 50% retracement in S&P 500. That would give levels of  ~ 1000.
Yes, it could well be that S&P could rally another +11% from current levels of 1400 to reach its 12 year high of 1563, before falling to 1000. ( Definitely ,the case for going short would be stronger when it reaches it multi year top of 1563)
So when will the market hit the peak in 2012 ?

Typically, indicators such as bullish sentiment, IPO volume will mark the top. We already have some of the ingredients.Facebook IPO. Internet related IPO `s in 2011 already highest level since 2000, according to Dealogic.

Since the bull market rally from early 2009 , S&P 500 has stayed above the 200 simple DMA for 6 to 10 months,before a mean reversion to the 200 DMA and below.
Most recently ,S&P 500 broke out above the simple 200 DMA in 23 Dec 2011.So giving it 6 to 10 months to peak would give time of  June 2012 to Oct 2012. ( FYI - The `final` peak in years 1987,2000, 2007 were reached on 21 Aug 1987 ,1 Sep 2000 and 12 Oct 2007).
Below is comparison of S&P 500 performance in the year 2007 vs 2000 vs 1987.
Most are questioning if we are entering the fourth year of bull market since 2009 or is this the first year of the new bull market ? NY post here.
Same newspaper has a very uncanny post on 12 Oct 2007 on Paul Tudor Jones - The Man who won as others lost. (S&P hit the top of 1563 on that day).Post here

Now lets see India NIFTY from 2009 to 2012. It saw a sharp rally of +141% in just 2.3 years and then saw an long drawn correction of -27% that extended for over a year i.e not a sharp 25% correction in just 3-4 months.Recently,along-with Global Markets,NIFTY also has risen sharply from its low in Dec 2011 end.NIFTY has rallied +21% and we have just seen a 7% correction so far. Chart below

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