I love analogs. I am not talking vinyl albums vs. CD’s but rather the possibility of repetition in current market action based upon a period in the past. A new and interesting example is in the chart below. It’s pretty self-explanatory but in case it doesn’t jump out at you … the bottom chart is a look at the price movement of the SP500 during the 2006 climb to its all-time high (at that time) and includes part, but not all, of its decline to its 2009 bottom. You can see the failed breakout in July 2007, which was followed by a quick, sharp decline, ending in August. From August’s bottom, the SP rallied to a point just slightly above July’s high and then turned tail, reversing course. That October failed breakout turned out to be the beginning of the long, 15-month 50%+ decline to March 2009’s bottom.
The top line is what the SP500 has done from 2016 to the present. Note the similarities of the initial breakout, followed by a quick, sharp decline and then a rally to new highs. Where we sit today, the SP500 has followed an eerily similar course as 2007. We just fell under May’s breakout level,
What the chart implies is that if markets repeat (they often do follow similar paths) and if we follow the 2007 analog, we are in for a really tough market in the months ahead.
Unlike analog music, I find market analogs to be something much more interesting to view than listen to.