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1993-94 Redux


Just the way I like it



I appreciate your "devil's advocacy" with so many so willing to buy into the bull case simply because stocks are going up for a few weeks.

Just a quick clarification about
your comment about the single-digit VIX in late 1993 (the last time it dipped this low.)

You wrote, "Vols are certainly not today's business (as Jason pointed out, the 1993 sell off occurred several months after the low water mark for the VIX.)"

Actually, the 1994 SPX sell off commenced just five weeks after the VIX all-time low of 9.31 in December 2003. The index dropped 10% in February and March of 1994 to 435---a level which it has never fallen below since, by the way.

That's the good news (if you are a bull.) The bad news is that the high from January 1994 (483) was not actually exceeded until March 1995 (14 months later). And the 435 March 1994 low was re-tested twice more---June 1994 and again in December 1994. So essentially another year of trading-range action.

So when the VIX hit single-digits in 1993, it didn't mark the top exactly. But it was pretty close. And the SPX was only able to gain another 2.5% over the ensuing five weeks to a top (works to SPX 1260 today).

And that 483 top in 1993 held for 14 months. So it was a fairly solid intermediate top.

If we follow the 93-94 script (big if), we would top at SPX 1260 sometime in late August and decline back to 1137 (perhaps not coincidentally the April '05 low) by late October '05. We would revisit that low sometime in late January 2006 and again in late June 2006 before heading up for good (assuming we follow 93-94, of course.)

Interestingly, the Nasdaq took a different path in 1993-1994. It topped along with the SPX in late January 1994 and fell 5%. But then it went on to make a marginal new high (less than 1%) in March 1994 while the SPX made a lower high. Then both indexes got in gear to the downside. The SPX bottomed in late March 1994, while the Nasdaq didn't bottom until late June 1994.

Obviously, I have no idea if the 93-94 experience has any resonance to today. But it's interesting to see how they may parallel.

Tony Dwyer may be correct in thinking the market will go strongly higher. But as the 93-94 example shows, there may be some potholes along the way and the promised land may be further off than many believe. The fact that the 1994 top---which held for 14 months---came just five weeks after the VIX spiked below 10 should give some pause to the immediate bull case.

Just to clarify, I am not suggesting that the VIX pattern from 10 years ago will repeat today. It's just interesting to see how the market reacted back then as a clue to our current landscape. Obviously, the ultimate resolution in 93-94 was bullish in that it led to a huge up year in 1995, not to mention the blowoff rally from 96-00. But it took over a year for
the bullish resolution to play out.

With the VIX spiking to all-time lows, with small traders buying 2x-3x more calls than puts to open, with the 21day equity P/C ratio plummeting to a zone that has coincided with tops for the past few years, with bulls parading and taunting, I'd like to think there might be better buying opportunities ahead than right now.


Minyan David


Thank you for the historical insight. Below is a point & figure chart of the SPX from 1993 to 1994, courtesy Dorsey Wright. It illustrates the wide range the SPX traded in that year.

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