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Trade Like the 1982 Uptrend Is Coming Back


If we follow the pattern of that recovery, there's opportunity to buy into leadership.

There have been many articles and theories thrown out speculating as to which former bear market and follow-up rally our current market mirrors most.

The years 1974 and 1987 are mentioned frequently as having similar characteristics to the current environment, with their subsequent multi-year periods of stagnation and sideways action in the averages.

The truth is that all market prognosticators, myself included, are merely making an educated guess as to where we go from here and truly the only opinion that matters is the one that shows up in the current tape. That being said, I see similarities to another period that might offer a slightly different take on the period we are now entering.

The year 1974 is brought up as illustrative because, after the devastating drop of more than 40% in the autumn of '74 and then a reversal to slightly new highs 15 months later, the Dow Jones 30 suffered another massive selloff to the tune of more than 30% that lasted almost two more years. In fact, on the heels of that second selloff the markets trended sideways for another two years, and didn't match the old highs until early 1981. So for more than seven years, although trading opportunities were to be had in the markets, the Dow Jones Industrial Average went nowhere.

The other correction that's brought up would be the one that started in 1987 with the infamous crash in October of that year. From a high that was more than 2,600 in late August 1987, the Dow dropped under 1,620 a mere eight weeks later, culminating in the panic selloff on October 20. This time it took a full 24 months before new highs were established, and then the Dow had a second selloff of a tad less than 20%. From there, the recovery didn't take as long as in 1974, but nonetheless from late 1987 to early 1991 the market gained nothing. At that point, the decade-long bull run of the '90s took investors further than they could have imagined.

I'd like to posit that 1982 may also provide viable insight into where we're headed for the remainder of 2010. Instead of laying out the fundamental framework of the similarity of banking woes, high unemployment, and oil prices, we'll let the charts do our bidding.

Take a look at the seven-year weekly chart of the Dow 30 from 1980 through 1986. As a trader can see, the 1981 highs were made in the first half of 1981, topping out around 1010. From there, the selloff ensued and 16 months later the Dow 30 sat under 790, a 20% drop. Although this drop isn't as dramatic as the 2009 peak to trough of 40%, the V-shaped uptick off the bottom is the real focus for both periods. By the end of 1982, all of the losses had been recouped on the Dow. Notice on the chart that at the end of 1982, the Dow had several months of sideways action before launching into a full 12-month 25% run.

If our current rally shapes up accordingly, and we have a few months of sideways consolidation and then launch into a secondary bull run, there are many names that will be leading the charge. I have no way of knowing if 1982 is the chart that will telegraph the current moves, but if it is, then a trader will want to make a watch list of market leaders that are willing to step up and lead the next phase. I'm providing a few here that all traders need to keep on their radar if my thesis plays out. All of the following are weekly charts for five years.

International Business Machines

Click to enlarge

The basic pattern you'll see in each of these charts is that they're all tracking at or near multi-year highs. It is this strength that wil lead if we have a bull run into the end of 2010. The summer of 2008 brought IBM (IBM) to all-time highs, and from there it swooned with the rest of the market malaise. Like clockwork, IBM reasserted its move and found itself within stiking distance of new all-time highs in early 2010. Currently a tad off of that mark, IBM is nonetheless one to watch once it goes back to highs.
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No positions in stocks mentioned.

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