2001-Replay Meme Spreads
During the past few days, I have been comparing the S&P 500 to a similar period 7 years ago, in 2001, where a bear-market rally had traders convinced that the worst was over. That meme (idea) appears to have spread rapidly and now appears in this week’s Barron’s.
Alan Abelson writes in his influential column:
“In March 2001, the Nasdaq was off by more than 70% from its peak set only a scant year earlier. Investors became increasingly convinced that lightning had already struck, the landscape was littered with shattered stocks and a turn had to be in the offing. Were they ever wrong! Instead, recession reared its ugly head, profits posted their biggest declines since the 1920s and Nasdaq fell another 50% before hitting bottom deep into 2002.”
As I posted yesterday, next week should begin with large numbers of investors realizing that the bear market is not over. Enthusiasm for the recent rally should evaporate quickly.
May 10th, 2008 at 4:44 pm
Found your site though a link at Calculated Risk and really like your Tax Withholding work.
I also have noticed the similarities with 2001 but also noticed with some additional backtesting that these Bear Market Rallys tend to peter out at the 50 Week EMA with the odd temporary throwover to keep everyone honest.
I’ve bookmarked your site and hope to pop in to see what’s cooking from time to time. Keep up the good work and good luck!
May 10th, 2008 at 4:46 pm
Oops! Actually the link was at Russ Winter’s blog and not Calculated Risk.
May 10th, 2008 at 6:17 pm
Hi Akula,
Thanks for the kind words. Looking at the S&P 500’s 50-day EMA, I see almost the exact same pattern now as at the peak in October: On October 11th, SPY closed 4.5 points above its EMA. At the peak on May 2nd, SPY closed 4.9 points above. In both cases, the EMA line was rising with about the same slope.
If you have posted any of your research, please post a link. I’d love to take a look at it.
Matt
May 11th, 2008 at 5:26 pm
“Claud” compares the present day market to 1990:
http://www.patmedia.net/claudb/
My thoughts: The SP500 drops to the 50 day SMA and we stay in a trading range until after the election. Look for a raly in retail next week.
May 11th, 2008 at 6:54 pm
Hi Brian,
That’s a pretty long time to be range-bound - 6 months - especially when the economy is deteriorating.
I think the market will follow the economy down because so many traders already assume that the recession and bear market have come and gone already.
Matt