Are we are Doomed to Repeat History?

Will history repeat itself? Since I began toying with the idea that the 2007 “slowdown” may look a lot like the 1990 recession for the stock market, I am still surprised by how the data is tracking. Let’s look at the data.

The S&P hit a peak in 1990 at 369.00 on July 17th. Then, just 13 trading days later, during the week of August 6th, the index was hit with the “death cross” when short term moving averages cross below longer term moving averages (in this case, I track the 10-week ema and the 40-week ema). You may recall that the Gulf War was hitting about this time and the markets were taking a queue from the oil pits. I mention this crossover event because the 80-week moving average was also broken this same week, suggesting a bear market.

After some initial attempts at a bottom (the 1st attempt at 306 was put in on August 23rd), it was finally reached on October 11th some 59 trading days after the top was put in. From top to bottom the index experienced a 20% loss. Following the official bottom being put in at 294.00, the market retested that bottom 13 trading days later on October 31st with an intraday low of 299.00.

So where are we with the current correction? Well the S&P index peaked on October 11th of last year at 1576.09. By the last week in December, it had similar moving average crossovers on the way to what is currently a bottom that was reached on January 23rd at 1270.05. Top to bottom, the index had experienced a 19.4% loss, slightly lower than the 20% experienced in 1990. It also took 68 trading days to reach a bottom as opposed to the 59 trading days mentioned above.

Is it pretty similar so far? It is to me. Now let’s look at a potential retest of the low. In 1990, the retest occurred 13 trading days later as described above while a current possible intraday low was reached for a 2008 retest on January 23rd (11 trading days after the bottom). Again, pretty darn close.

So if the theory holds (and this has always been a huge “if”), then the market will rise out of the ashes in 50 more trading days. In 1990, after some volatility (sound familiar?), the market stopped looking back on January 14, 1991 after hitting an intraday low of 309.00. That puts us on a course for the market to really pick up steam right around the 1st of May.

Hopefully, we will all enjoy this summer.

Disclaimer: Metrics have not been verified (I may be off by a trading day or two). This was a back-of-the-envelope exercise in which I am confident that the results will not materially change, but the details may be slightly off.