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7 Analogs That Help Explain Current Stock Market Action


The market is acting similarly to the way it has in the past. Here's what happened next

The current stock market action brings to mind a number of analogs. You are likely to be familiar with some of them. A few will be brand new. Let's take a look.

1816 & 1917

In September 2011 the stock market was down for the fifth month in a row. Each month was worse than the preceding one. This is the third time this has happened since 1800. What is interesting is it has happened in the second decade of each century.

December 1816 -- That proved to be the low until the 1840s. The market went up 74% over the next eight years.

November 1917 -- The stock market went up 35% in 1.66 years.

In both instances, after their rallies the market eventually went below the lows on the signal date.


One of the hallmarks of a secular bull market is a double digits earnings yield. The last time the S&P 500 closed at a double digit earnings yield on a monthly closing basis was November 30, 1984. Is there any precedent for the stock market having single digit earnings yields for such a prolonged period of time?

Yes. On July 31, 1877 the S&P closed with an earnings yield of 10.22% (data from Robert Shiller). That was the last time the S&P closed the month with a double digit earnings yield until Halloween 1907. That is a time span of 30.25 years. July 1904 would be the equivalent stage of the cycle to the current span (i.e. 27 years). Back then the earnings yield was 7.47% which is rather close to the November 24, 2011 reading of 7.49%. From July 1904 to November 1907 stocks went down 7% but earnings went up 31%.

Also note every bull market since February 1973 has lasted at least five years.


As you can see this chart was working spectacularly well up to June 2009. Since then it has lost some of its luster. If the analog still holds true with respect to time, the stock market would put in its decade low in late 2012.


There was a 29% bear market was from May 1946 to June 1949. The main similarity to 1946 and now is the advance/decline line was hitting new highs at the stock market's high. This has confounded some bulls as usually the A/D line peaks before the stock market.

The 1946 high was in May.
The 2011 high was in May.

The 1946 third quarter was the fourth worst since 1800.
The 2011 third quarter was the ninth worst since 1800.

The 1946 low was in early October.
The 2011 low was in early October (so far).

The market rallied 14.7% from its 1946 closing low to its February 1947 closing high.
The market has rallied 16.9% from its 2011 closing low to its October 2011 closing high.

Then-earnings increased an astounding 36 months in a row from July 1946 to the bear market bottom of June 1949. Stocks' earnings finally surpassed their December 1929 high in earnings in January 1948 and continued to hit an all-time high 18 months in a row all the way to the bear market's June 1949 BOTTOM.

Now-earnings are set to finally beat their June 2007 all-time high this month despite the market recently undergoing a 19% correction.

The 2001 Nikkei

The above chart was made by setting the February 29, 2000 Nasdaq and December 31, 1989 Nikkei all-time monthly closing highs together and adjusting them for their price on that day. On the Nikkei we are at the equivalent of September 2001. This analog was working nicely up to and including August 2010 when Ben Bernanke announced QE2. Now that the presses have been turned off, is the analog getting back on track?

Late January 2003

This is an interesting one. The analog is actually of an indicator rather than an index. The indicator is the percentage of stocks above the 200 Day Moving Average of the New York Stock Exchange. The recent pattern in the indicator is extraordinarily similar to the July 2002/Oct 2002/March 2003 bottoming process. In both cases, we had a double bottom at around 10%, a rally to new highs at around 40% and a third leg down to around 20%. If you look at the S&P chart below the indicator, you will see that it was a fine time to buy stocks (late January 2003). The bears may note there is a similar pattern around July 2008. However, note that even in this scenario a minor rally took place which brought the indicator back up to around 40% before the bottom fell out.

The 2006 Nikkei

The Central Bank came up with the idea of printing money and buying government bonds. After years of trying, the central bank realized it didn't work so it finally stopped. The stock market responded by immediately tanking 19% on a closing basis. It went into bear market territory intraday the next day before staging a double digit rally for three weeks. Then it slid right back down to test its lows. Sound familiar?

Yes, it is the 2006 Nikkei. If the S&P would behave in the same fashion, it would test its recent low (which it is doing) and stay above it. It would then rally again and go a little above this year's high of 1370 in 2012. It would then collapse to below its 2009 low just in time for a 2014 mid-term election year bottom.

In every analog listed in this article, the stock market eventually went lower than the equivalent of this year's low. So we probably have not seen the low of the decade. However, some of the analogs are suggestive of a rally before the fall. These analogs suggest a trader's mentality will be better rewarded than blindly buying and holding for the rest of the decade.

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