Was 2018 A Growth Scare, And Will 2019 Be Like 1999?

As the stock market pushes higher, the year “1998” keeps popping up in our market studies recently. 1998 saw a rapid stock market crash, a retest (something we have yet to see today), followed by a massive nonstop rally. Everyone at the time thought that the 1998 crash was the start of a much bigger crash. To their surprise, the bull market (already late-cycle) surged for another 1.5 years before topping.

There is indeed the possibility that today is similar to 1998. There are fundamental and technical parallels.

 

Fundamental parallel

Towards the end of a bull market and economic expansion, there is usually a sharp growth scare that convinces market watchers “this is the start of a mega-crash”. In reality, big bear markets typically start off more slowly.

Inflation has dropped more than -1% over the past 6 months (a rapid decline thanks to oil’s crash), while unemployment is under 5% (i.e. late cycle).

 

 

 

Here are similar cases, and what happened next to the S&P 500

 

Note the late-cycle cases:

  1. March 2006: the bull market lasted another 1.5 years
  2. 1997: the bull market lasted another 3 years
  3. March 1967: the bull market lasted another 1.5 years

Late-cycle indeed, but not an immediately long term bearish sign for stocks

Breadth

This will be our last breadth study for a while because there’s no point in constantly talking about “extremely strong breadth”.

The NYSE McClellan Summation Index is extremely high right now, above 960. Bear market rallies typically do not see such strong breadth.

 

Here’s what happens next to the S&P 500 when the NYSE McClellan Summation Index exceeds 960

*Data from 1998 – present

 

The S&P’s 6-12 month forward returns are quite bullish.

VIX’s “non-confirmation”

I follow a bunch of conventional traders because I want to know how conventional technical analysis views the stock market right now.

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Our discretionary outlook is not a reflection of how we’re trading the markets right now. We trade based on our quantitative trading ...

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