Nearing a Market Top

Includes: QQQ, SDS, SPY
by: Sydney Williams

Nobody wants a good thing to end, especially an historic run in the equity markets. Precedence, though, suggests that we're nearing a conclusion.

From its March 9th low through August 21st, the S&P 500 has rallied 51.7%, the index's best 117-trading-day performance since before 1950. In fact, five of the ten best continuous 117-day periods between June 1950 and August 2009 occurred this month, as the table below illustrates.

January 1983 featured three of these periods, and the end of May/beginning of June 1975 the remaining two. (Both of these periods come closest in showcasing the same type of performance.)

The market has been so strong that of the 14,890 continuous 117-day periods over this six decade time frame, just three periods posted gains over 45%: those ending August 19th, 20th and 21st.

And on only 89 occasions did the market gain more than 30%. That's less than 1% of total. The market, moreover, only managed a 15%-or-more advance during less than 14% of this period.

82% of the time it ranged between -15% and +15%.

Clearly, the current race upwards marks a distinct reversal from the market's nosedive in the first days of March and in November last year. Too far, too fast? Statistically, at least, we've sprinted deep into outlier territory. If we go by our table above, then the more "normal" trend line for the S&P would be the 0% to 15% range.

Let's assume a flat market. It would take 39 trading days at the current 1026 level for the market to mean revert back into the sub 15% range. Under a correction, this could happen more quickly.

On the other hand, for the market to sustain its record-setting 45%+ pace until yearend (for example), it would have to average daily gains of between 0.4% and 0.5%. That would equal a closing level above 1500. Improbable, if not impossible.

While August 2009 showcases trading patterns similar to June 1975 and January 1983, it also features a much different backdrop. These two preceding months actually resemble each other much more closely than either one does August.

In both months, the economy was three months into recovery, after severe, protracted downturns. In both cases, cyclical unemployment peaked exactly one month prior: in May 1975 at 9.0%, and in December 1982 at 10.8%. 10-year Treasurys were yielding 7.86% and 10.46%, respectively, while inflation soared at 8.5% and 6%.

Politically, the Democrats held both the house and senate in 1975, but not the White House. The Republicans under Reagan controlled the White House in 1983 and the senate, but not the house. Unlike today, free trade and capitalism energized a small minority of the world's population.

Tax policy varied, however. Rates sharply declined throughout the 80s. Gasoline prices also varied. In 1975, they were rising, and, in 1983, falling.

Market direction tracked differently, too. The S&P 500 after June 1975 closed the year 5% lower, and would not sustain higher levels for another three years. After January 1983, the market finished the year 14% higher, but had also gained 15% over the subsequent six-month period, equal to the same period-to-end-of-year time frame as 1975. Also, the nearly two-decade long bull run had just begun.

August 2009 is unique in many aspects: the global landscape, the point of time in the economic cycle, the credit and banking systems, the regulatory and legislative outlooks, to name a few.

Whether we're facing a lengthy flat market or a sharp pullback, don't expect the historic resurgence to continue.

Disclosure: No positions