Current Market Is a Mirror Image of the 2002 Bottom

Over the last couple months, I've seen more historical market overlays than ever. The current market has been compared to everything from the 1970s market to the 1930s, from the 1987 crash to the 1990s financial crisis. But you don't have to go back very far to find an analogue to the current bottoming formation. The current market looks a lot like the bottom formed between July and October of 2002.

click to enlarge images

After the October bottom and surge, the market drifted higher for two months before rolling over to make a final bottom in March 2003.

The current market could certainly move higher into the summer before rolling over again. A plausible scenario is that the current rally turns into a trading range between 840 and 940 on the S&P 500, which was an area of consolidation prior to the most recent decline. After a consolidation, the market could get spooked lower again by poor first quarter earnings which will begin to hit in late April and early May.

Whether the next retest of the bottom holds at that point would depend on whether earnings estimates have bottomed and whether the financials begin to stabilize. In March 2003, earnings estimates for many companies were already moving higher and fundamentals were already improving. The only issue weighing on the market in March of 2003 was the upcoming Iraq war.

This time, if earnings estimates begin rising after the first quarter is reported because investors have gotten too pessimistic, then I think we could see a similar bottom play out. However, if another crisis hits or earnings estimates continue to fall then I think the bottoming scenario won't play out like in 2002-2003. The next three months will be key in determining the longer term outlook.

Comments

[reluctantQuant]

nice point here on the similar pattern with the 02-03 period. a monthly chart of the NYSE composite takes some noise out, and the intra-month support at the 4400 level is quite prominent. Now we see recent months showing recurring support at the 4600 level. A third bounce off of that would be about 5 months off, should things continue this "mirroring" behavior. Interesting.

But, short of the Fed ease, there seem to be a LOT of things going on around here that I certainly didn't notice last time...

--rq

2009 Mar 25 09:58 AM

[ain't no fortunate son]

I made similar comments in the first week of March about the similarities to 2002-2003.

Here is a link if it works:

seekingalpha.com/artic...

"Many major bear market bottoms such as we saw in the dotcom bubble meltdown concluding in 2002-2003 are marked by two lows.

The first is a MOMENTUM bottom characterized by a terrifying collapse in stock prices as the investment community reacts in fear and panic to a new set of news and earnings dynamics and is forced to rapidly throw out all their preconceived notions about the direction of prices as the bubble starts to deflate. The panic - driven collapse is also marked by a huge spike in the VIX. That occurred in October 2002 and it occurred in Oct/Nov 2008, when many investors put on what was later called the Armageddon trade.

The second low is set later, and it is the PRICE low. It is not accompanied by a new spike in panic as the prior momentum low fairly discounted the extent of the carnage to be anticipated in prices and economic conditions. It is a grinding, frustrating process this time as the last of the sellers finally throw in their hand and dump stock. VIX does not approach its old levels because there is no really unanticipated terrible news, just a seemingly endless supply of day-in, day-out bad news. The markets priced in that second low in March 2003, and market conditions and charts are showing that the are some similarities now as then, and perhaps we are grinding our way to a price low in the March/April '09 timeframe.

I believe the VIX is reflecting a lack of any NEW fears at this time, and thus trading at a reasonable level for market conditions."

2009 Mar 25 11:47 AM

[logicalman]

mkts we're up around 2%, then down more than 1%, and finished the day with a 1% up move....long looks pretty good to me..for another leg up......

2009 Mar 25 08:39 PM

[Bruce Pile]

Oh if only our problems now were as simple to fix as our problems then!

2009 Mar 25 09:06 PM