A Checkup On The Pattern Similarities Of 2000 And 2018

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: ANG Traders
Summary

We do a checkup on the similarities between the trading patterns of 2000 and 2018.

We find that the patterns continue to replicate rather faithfully.

The similarity in these two markets implies that after one more pullback, the current correction will end and the next, and possibly final, rally should occur.

The fact that the patterns do not share the same time length means that they are more fractal in nature and therefore the end of the next rally could be years instead of merely months away.

No two market periods are going to be exactly alike, but since human emotions do not change over time, all bull markets (and bear ones too) will have repeated similarities.

More than two years ago, we started writing about the similarity of today's bull market with that of the tech rally of the late 90s (see here). Since then, the similar patterns have continued to replicate, providing confirmation of our thesis that human emotion drives markets and leaves behind "footprints" in the form of repetitive pricing patterns.

In mid-October, we updated the similarities (here) of the price patterns of 2000, and 2018. Part of our conclusion to that piece stated:

...we expect to eventually see another rally (R5) which could result in a double top and, as in 2000, the start of a new bear market.

Six weeks later, let's check-up on how the patterns are developing.

Technical And Sentiment Indicators

The two charts below compare the weekly technical and sentiment profiles of correction 3 (C3), rally 4 (R4), and correction 4 (C4) in both 2000 and 2018. Notice how closely the MACD, RSI, stochastic, and sentiment profiles continue to match following the new highs (pink highlight).

Taking a closer look, notice that in 2000 the C4 correction had two bounces (green dashed-arrows) and that now, in 2018, we seem to be close to completing the second bounce of the pattern as it approaches the 62% Fibonacci retrace of the entire C4 correction (like in 2000). The similarities in the pattern of the VIX, MACD, RSI, and sentiment are impressive. If the pattern continues to replicate, we should see another pullback before the R5 rally starts.

Price-To-Earnings Ratio

Notice in the two charts below, how the P/E ratio increases as R4 reaches new highs, then decreases as C4 progresses (black dashed-arrows). The trading pattern continues to replicate with the P/E having dropped like it did in 2000.

Dividend Yield

The dividend yield of the S&P 500 continues to replicate the pattern from 2000. Although the dividend yield is higher now than during the 90s' tech rally - 1.9 compared to 1.3 in 2000 - the way the yield changes is similar, at the "double bottom," in both time periods, the yield spiked up then generally sloped downward. As C4 starts and progresses, the yield rises then falls again in both markets (purple dashed-arrows).

Net Yield

Most analysts use only P/E or price-to-sales when studying stock market valuation, but these measures do not take interest rates into account. Our preferred measure of valuation for the S&P 500 is net yield which we define as the dividend yield minus the six-month Treasury rate. In both markets, the net yield has steadily decreased, forming the same general pattern today as in 2000. The small bump up in the net yield during C4 of 2000 also has developed this time. Any flattening of the net yield will be a warning that the bull market is fading.

In conclusion, the patterns from 2000 continue to replicate. We expect one more pullback before the C4 correction completes and the R5 rally gets underway. The timing, however, is impossible to predict since the waves in this bull market have been much longer in duration than those of the tech bubble making them fractal in nature, which could extend this bull market out from this point for years rather than months like in 2000. We realize that the idea of this bull market lasting another year or more is hard to swallow while we are in a correction, but that's what the historical patterns are saying is likely to happen.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.