The regression channel has been violated and there is still a chance for a lift back into the yellow circle "entry" zone and as the market discounts the next report, there could be some nervousness and selling before a solid report is announced.
For now, however, I will look for shorting opportunities in AAPL .
Maybe the market looks toppish, but we should not forget we have quite a different fundamental environment.
* Let's start with the big rallies = 2009-2012 +111% vs 1984-1987 +151% (and actually 1982-1987 even +250% !)
* 10y yield currently (due to the FED artificially low) at 1.8%, in 1987 it was 7% (and coming sharply lower since 1981 at 15%)
* S&P500 dividend yield currently say 2%, 1987 it was 3% (coming from 6% in 1981)...
So in this respect 10y and S&P dividend yield is say roughly both 2%, in 1987 yields were much cheaper vs S&P dividend yield
* Inflation now and then is roughly the same around 2% (but coming down sharply from 1980 at 14%)
So if the technical picture is maybe similar given ever narrower rising wedge and negative divergence (accompanied with a very cheap and low VIX), let's see how the market will do in the next days.
Back in 1987 the market actually topped out on 25th Aug, went lower until end Sep, retraced a little until 2nd Oct. Then it just gradually weakened a few days. On Oct 15th market already got hammered down 4%, and the next day Oct 16th another 8%. Over the weekend - I think it was G7 - decided to weaken the US$ and on Monday markets crashed 22% given the then unexpected program trading selling spree. .... and as we now know recovered all of this 41% (25Aug-20Oct) in the next few weeks and started a humoungous rally. (looking on long term charts now the 1987 crash was just a blip haha)
So, it didn't really happened overnight, the market topped out end of Aug and after weakening 7 weeks it started with a 2 days market shake up , followed by that market earthquake the black Monday.
But nevertheless, the other parameters and environment are quite different. Bonds are actually much more expensive right now than stocks. I expect a correction, not a market crash.
Tim, can you explain, which pattern do you find almost identical ?
(by the way, I started my banking traineeship in Aug1987 and was in the equity trading department in Oct , helping out filing orders after hours in that mess.) I still have the daily newspapers from then ! LOL
As for technical similarities of AAPL and the stock market in 1987, it was simply the patterning of the price action. If I could draw out the pattern from the S&P500 in 1987 it would be like this:
1. A large rally, followed by sideways basing action over a wide range.
2. A rally out of that consolidation followed by another, much smaller, much less time correction.
3. A last rally out of that consolidation that ends at the same price distance as seen in #1 added to the consolidation area.
Accompanying the rally is what seems to be a widespread belief that we are in a new age with plenty of excitement and plenty of money being made. That was the 1987 environment.
I was investing in that time frame and I was also a student of economics and a world traveler from 1985. There were many factors at that time that are worth detailing in a chart to show everyone here what was really going on under the surface and going on in related markets. Most people gloss over inflation rates that were rising dramatically. Treasury bonds were getting crushed along with the US Dollar. Gold was moving up strongly as was the price of crude oil. Trade tensions were mounting. Japan was buying up the world, literally with their extremely low interest rate environment. Real estate taxation had just shifted and that would change the flow of funds into the banking system for years to come. This was extremely important to the course of the markets, in my opinion. 1986 saw a disruption of the trend of buying real estate that generated a cash-flow loss because those losses were no longer available to use against ordinary income. Instantly, the market for real estate started to crater, and later to collapse leading to the S&L bailout in 1988 to 1990. The capital gains tax rates were going up from 20% to 28% and it was only a question of "when do you sell to lock in these crazy gains in stocks?" Sell in 1987 to lock in the lowest rates or wait until 1988 and get much higher rates. Well, Government Bonds jumped up to 10% and provided all the incentive to bail out of stocks and to switch into bonds. The dollar decline, changes in tax policies in stocks and real estate, high inflation rates only seemed to make it obvious that it wasn't worth the risk of owning stocks. The clamp down was in place to shut down the speculation. Greenspan stepped in in August 1987 and made the world wonder what he would do given his published views supporting gold and reducing leverage in the banking system. It was a perfect storm, but it was solidly in place and destined to happen. The speed and severity of the decline, 2722 to 1700 on the cash DJIA was a sharp drop from August 25'ths peak to October 19th's low. Less than 2 months wiped out over 1000 points or 40% of the market cap.
I'll come back to this tomorrow. All the best, Tim 12:12AM EST Tuesday, Feb 12, 2013