March 1st, 2008

1973 and 2001 Market Crashes and Today’s S&P 500 Index

Just 7 trading days ago, in my February 20 disagreement with two fellow bloggers, I argued:

“…… as a chartist I strongly concur with everything said about symmetrical triangles except that I don’t believe it necessarily holds when applied to an index of a group of stocks. By definition, an index is comprised of many stocks, the chart of each evolving from its own unique set of dynamics. The only thing linking the stocks comprising the index are the background macro-economic forces and these take a longer time to unfold than is allowed in the above chart’s 4-5 weeks chart.

What drives all charts, particularly charts of market indexes, is momentum. Market momentum, or investors’ psychology, matures over extended periods and once set in a direction don’t, on their own without an external driving force, change that direction.”

I’ve been tracking here what I believe to be a reliable indicator of market momentum, what I call the Market Timing Indicator. Yesterday’s 2.71% drop in the S&P 500 Index brings the 180-day moving average even nearer to a crossover of the 300-day moving average:

I boldly predicted and reiterated that when that crossover occurs, sometime around March 11, the market will resume an even more accelerated decline. The next support areas appear first to be around 1233 (down another 7.3% from here) and ultimately around 1150-1175 (another 11.% from here). That later level would leave the market 25% under the all time high of 1565 set on October 9.

I hope not to sound like a scaremonger but need to point out that a look at comparable charts of the 1974 and 2001 peaks are instructive for seeing what can happen when downside momentum grabs hold of market players. The 1973-4 market crash mirrors many of the same forces that are at work today (escalating gas prices, inflation, weak dollar, weak President … staglation).

The 2001 peak resulted from the bursting of tech bubble and lead to a 45% decline over more than 2 years.

Of course, no one can predict the future and I’m not trying to do that here. What I am saying is that previous occurences of this crossover were precursors of further adverse momentum and market deterioration. Contrary to what the TV talking heads tell you, it’s no time to be buying on the dips! On the contrary, when the crossover does occur it’s time to buy puts on the market and load up on Ultrashort ETFs.

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