Sunday, June 27, 2010
Are We In the Summer of 2007?
The first chart is from 2007 and shows the March 2007 correction was almost exactly the same in size and duration 13 days as the January 2010 correction in the SPX, which is shown in the second chart. The recovery bounce off this correction in 2007 was a melt up straight higher, the same way our Feb-April melt up played out. Both of these rallies lasted just under 3 months in time and extended at least 161.8% higher beyond the correction to make new highs.
This correction also saw the break of the 200 day ema and lots of folks got bearish when that level broke back in 2007. Of course it was the right move long term but short term it provided for a bear trap in which the shorts got squeezed as the market rebounded into the fall of 2007 and eventually made new highs at 1576 before rolling back over and starting the bear market in early 08. This is the same feeling and behavior the current market is showing as the correction in May saw a break of the 200 day ema and it has stabilized enough to bounce back but has remained volatile.
You see from the summer of 2007 it took a little bit of time backing and filling before we saw the rally to new highs. This is kind of what we are seeing right now in the market as the SPX bounced back to 1130 and then sold off to 1070. Since we made price lows we have traded above those lows for about 22 trading days. The rally in later summer 07 lasted 39 trading days off the low in August and eventual high in October. So if you are a believer in history repeating itself then we could grind up for another 17 days or so before a similar fate for the stock market could be dealt, that being an important high being reached. That timing could come in around mid July.
Fundamentally speaking, the markets topping action in 2007 was as a result of fear of the unwinding of the credit crisis and eventual defaulting of debt by several large banks. The current fear of 2010 in the market is over the unwinding of the sovereign debt crisis in Europe and potential global contagion that sees entire countries defaulting on their debt. It's a very similar and real fear.
The similarities of the SPX in 2007 and 2010 are amazingly glaring so whatever you believe is headed our way you cannot ignore the price action as it is the most unbiased indicator of all aggregate supply and demand in the markets between participants.