It's a Mad, Mad, Mad, Mad Market
...there was a treasure below the second W in 1987 - if you were short. For that matter, not being long was golden at the time.
I remember, I remember when I lost my mind
There was something so pleasant about that phase
Even your emotions had an echo
And so much space
-Crazy by Gnarls Barkley
As a kid I loved film. Still do. Which is probably testimony to my stint at NYU and London film schools. But that's not what this is about. For me, the poster child for pure comic lunacy was the movie "It's A Mad, Mad, Mad, Mad World." An epic comedy that filled hearts overflowing with so much laughter you cried.
The movie was the granddaddy of 'headcases' on a chase – eccentric personalities twisted into caricatures of themselves chasing after something. That something was, as is usually the case, hidden treasure – a pot of gold hidden at the end of the rainbow. Or, in this instance, a briefcase of money under a "Big W."
Imagine Milton Beryl, Buddy Hackett, Jonathan Winters, Mickey Rooney, Don Knotts, Sid Caesar, Jim Backus, Terry Thomas, Phil Silvers, Dick Shawn and Ethyl Merman, each trying to 'one-up the other' on this treasure hunt. Not to mention the three stooges as firefighters.
Something not too dissimilar might result if Jerry Lewis were to direct the sequel to the movie "Wall Street" instead of Oliver Stone: comic genius hedge funds with big bulbous, billion dollar bonus noses; and oversized green flippers (read leverage), walking on water (read liquidity) seeking sunken treasure. Sunken treasure lifted by Pirate Equity Salvage Artists sifting doubloons from the wrecks of Spanish galleons. A 21st century keystone cops derivative, memorialized by a clown car chase of cheap capital, causing equities to roll around like wolverines in the trunk of a Ferrari on its way to meet its Colombian connection.
"It's A Mad, Mad, Mad, Mad World" begins as Jimmy Durante has just careened off the highway, honking his horn wildly for everyone to get out of the way. With his dying breath he tells the occupants in the vehicles that have stopped to help him, that a fortune is hidden under a mysterious Big W. As Durante pronounced it " the Big Dubya."
So what does the Big W have to do with the market and its recent run for the roses with a current cast of zany professional equity hunters? From my perch, plenty.
You see, before the crash of 1987, there was a W formation in the spring. From the bottom of that W, which ended in late May of '87, the market erupted to an August 25th peak. An approximate 90-day blow-off. When the DJIA carved out another W in a September pullback that year, many participants, including myself, got bullish. Very bullish. I guess it's human nature to extrapolate what happened in the immediate past into the future. When the biggest one point rally in DJIA history (to that point) occurred in early October 1987 it seemed to confirm the correctness of the bulls' stance. That early October rally was a ruse.
As we all know there was a treasure below the second W in 1987 – if you were short. For that matter, not being long was golden at the time.
Now let's take a look at the current pattern of the S&P. In early spring, there was an outbreak of volatility, a sharp sell-off that traced out a W, which ended just above the 200-day moving average of the S&P. The W was followed by an explosion to a new all time closing high on the S&P, just as the rally off the W in the spring of 1987 led to an explosion to new all time highs on the DJIA.
Since the outside down day on May 23rd, the S&P has been choppy, with the index tracing out a fractal of the February/March decline, albeit of smaller magnitude. This time instead of the 200-day moving average acting as support, the 50-day moving average acted as support. The recent sell-off was shorter and sharper than the March decline, and found support at a higher moving average.
Of course, the thrust last Wednesday, Thursday, and Friday saw divergence in the analog from 1987 because the indices are verging on making new swing highs. Nevertheless as Mark Twain said, "History, although it does not repeat exactly, often rhymes." Is the market peaking in an eerily familiar repeat of a 90-day blow-off after a Big W?
Although the song remains the same in as much as the markets have run up a 90-day stairway to heaven, stocks may have bought some time. Why? Well, if I had told you in March that the S&P would make a new closing high, without surpassing its March 2000 intra-day high, and then pull back to its 50-day moving average; and test that moving average twice, carving out a little W; you would have thought it was a picture-perfect scenario for a run to a new all-time intra-day high; i.e., a move above the March 2000 1552 S&P high. It just seems logical. Doesn't it?
However, according to the time elapsed and the patterns traced out, the market doesn't owe us anything to this point – that is assuming that there is any significance to the symmetry – but with quarter end and the Blackstone IPO approaching, the market may have bought some time. Once again assuming the cycles I am looking at play out.
And there are more than a few reasons to think that the market is approaching a significant inflection point: It wasn't until last month that I remembered thinking in 1987 that one day a gorilla would ring the market's doorbell once again, and that I would recognize the chime. It wasn't until last month that I flashed on a thought that I had carried for at least a year after the '87 crash: "I wonder what the market will look like in 2007, when the 20-year cycle rolls around? Will we have another momentum driven melt-up into the summer? Could it be?"
Curiously, in 1987 we had a new Fed chief. In 2007 we had a new Fed chief as well. Many say the culprit in 1987 was rising rates. The last few weeks have seen a dramatic spike in long-term yields.
So here we are, twenty years after 1987, one hundred years after the rich man's panic in 1907, which is a key cycle, and seventy years from the important 1937 top. It is more than fascinating that in 1937 the high for year – after a five-year rally – was March 14th; while the low for this year – at least so far - has been March 14th. Mirror image cyclicality? A waterfall decline began in mid-August in 1937. On the fifty year cycle that is almost a direct hit from the August 25th top in 1987. If the fifty year, or Jubilee, cycle is important, as it certainly was in the last century with the two biggest lows of the century occurring in 1932 and 1982, it may be interesting to look at fifty years ago in 1957. That year saw a shakeout in the early spring, and a three to four month parabolic advance before a waterfall decline set in. In fact, every year ending in '7' since mid-1800s has seen a sharp decline, or a panicky sell-off. Will it be different this time? That's a mantra that the bulls are very fond of.
So, I'm wondering - in the Jerry Lewis version of the sequel to Wall Street the movie, will the Working Group be played by Moe, Curly and Larry?
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