UPDATE: This stock-market shakeout looks a lot like 1996-97
By William Watts, MarketWatch
1996-97 is best analog, but 1929 is No. 6 on the list: analyst
The stock market's turn from borderline euphoria to full-blown correction was swift and unsettling, but it isn't completely unfamiliar territory, according to one of Wall Street's top technicians.
Jeff deGraaf, chairman of Reinaissance Macro Research, said his firm has a program that looks at price changes for the S&P 500 index over the last-12-month period and then compares them to rolling 12-month historical returns to find the highest correlation with current market action.
In a Friday note, he said the closest match, or analog, is the March 1996 to March 1997 period, which had a .94 correlation (a reading of 1.0 would be perfect correlation).
That should provide some comfort to market bulls, but it comes with caveats.
"Today's price action is weaker over a shorter period of time than that of '96, and then, as we suspect happens today, the market needed a few weeks to convalesce before resuming its uptrend. When we aggregate the price paths of the top 25 correlations with today, the picture suggests a pause of a few weeks and resumption of trend," deGraaf wrote (see chart below).
That uptrend had a way to run in 1996-97, with stocks eventually setting their tech bubble peak in March 2000, albeit with some further downdrafts along the way. Federal Reserve Chairman Alan Greenspan uttered his famous "irrational exuberance" warning in a December 1996 speech.
The S&P 500 and Dow Jones Industrial Average saw volatile trade Friday (http://www.marketwatch.com/story/us-stock-futures-rise-as-dow-faces-worst-week-since-the-global-financial-crisis-2018-02-09), a day after another round of steep losses pulled both gauges more than 10% off the record highs set in late January and marking the first correction in more than two years. A late rebound saw stocks end with solid gains, but post weekly losses of more than 5%. Stocks continued their rebound (http://www.marketwatch.com/story/dow-futures-rally-more-than-250-points-as-focus-turns-to-trumps-infrastructure-plan-2018-02-12) Monday.
The Dow's slide into correction territory was its fourth-fastest from an all-time high since 1897, according to SentimenTrader, while the S&P 500's move from all-time high to correction was the fastest on record, according to Ryan Detrick of LPL Research.
See:Investor pessimism hits three-month high as FOMO turns to 'oh, no' (http://www.marketwatch.com/story/investor-pessimism-hits-three-month-high-as-fomo-turns-to-oh-no-2018-02-09)
While the correlation with 1996-97 offers investors a "bullish message," deGraaf cautioned that 1929, the year of the Great Crash, was No. 6 on the list, while 1970 was also flagged as a "reasonable template" for today.
-William Watts; 415-439-6400; AskNewswires@dowjones.com
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02-12-18 1614ETCopyright (c) 2018 Dow Jones & Company, Inc.