Current Market Is a Mirror Image of the 2002 Bottom

 |  Includes: DIA, QQQ, SPY
by: ContraHour

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.