While the current stock market rally is very impressive, the stock market’s rate of advance is cause for concern and is an ominous sign for all the Bulls or professionals chasing performance over the last few months.
We need to look back 77 years to find a move off of the final low in 1932 to find a rally that advanced faster than the rate of the 2009 rally, and further look to the initial low of the "Great Depression" in 1929 to find a rally of comparable speed to our current rally. Not even during the tech and internet bubble years of the mid to late 1990’s did the S&P advance this quickly. The difference this time around, is it feels like the government is cheering on this over exuberance with the help of the media instead of questioning it. Maybe it is their hope that the stock market rally will make people feel like the stimulus package and bank bail out has worked and that the economy is coming out of the current mess and we have entered a new bull market.
While the S&P drop from 2007 was only 58%, the rally in 1932 came after an 86% drop in 1929. That move retraced 52% of the loss from the 1929 top, over the course of 13.5 months; it advanced at a rate of .43% a day. However, after it topped in July 1933; that high level was not seen again until February 1946. Further, the high in 1929 was not exceeded until October 1954. The current 2009 rally has retraced 41% of the 2007 to 2009 decline which lasted 15 months. If the current rally were to retrace 51.96% of the loss from the October 2007 high, it would carry the S&P to 1140 just another 10% higher from current levels (1037). If it then followed the same path as the 1930’s, the market would not surpass the 1140 level until 2022 and not climb above the 2007 high until 2030. Judging from history along with the poor economic footing one should us extreme caution buying at current market levels and should us this bear market rally to position your portfolio for the next wave down.
There have only been three other times in history when the rate of the stock market advance was above .19% a day during a rally, and only once when the rate was above the current rate as mentioned above. The 1932 rally advanced at a rate of .43%/ a day and was followed by a 34% decline. The second greatest speed is equal to the current rate of .32%/ a day. This was the Bear Market Rally that followed the initial drop in 1929. That move was followed by an 83% decline. The only other move that was anywhere close to the current move; was a rate of .28%/ a day in 1938, which was followed by a 46% decline. If you took the average decline after such great advancements, the average move down was 55% you would end up at a low in the S&P of 467 sometime within the next 500 to 600 market days. Or another way to look at the extreme historical examples is to leave out the 83% decline and take the average of the smaller declines which is a 40% decline which would also take the S&P to a new low at 622.
The history all be it limited points to a large decline following a market rally that advances at a rate of .32% per day or faster. Since the rally from the initial low in 1929 is the most comparable, it a rally that warrants a further look. We have already exceeded the rally in terms of % gain and length. However, if you look to proportional levels comparing the initial decline then to the initial decline now; it yields some higher levels. Since the initial decline in 1929 was only 44.56% compared to 46.77% in 2009, it could equate to a level of 1070 using the October 2007 high, or 1042 using the secondary high in May 2008. The high on Tuesday 8/25/09 was 1037.75, which is very close to 1042, also the spike high in October 2008 was 1044 and will be a zone of resistance for the S&P. In addition the S&P is just passed a 38.2% Fibonacci retracement level of the March 2009 low to the October 2007 high, which sits at 1014.
Looking at the1982 to 2007 Bull move which has proven to hold significance since it caught the 666.67 low with the 61.8% retracement which is at 667.50 Coincidentally, if the next move down were to go towards the 467 level mentioned above which is the average decline post an extremely fast advancing rally, it is right near the 76.4% retracement level which is at 453 on the S&P. A lot will be made of the S&P hitting 500 and a breach will likely cause one last quick wave down of capitulation selling and levels of extreme market permission which will surpass that of February/March 2009. And put in a generational low in the stock market in which a sustainable market rally can start from.
