All trading involves risk.

Faraday Research in partnership with Tradefair

It wouldn’t be a market correction without comparisons to prior market tops. So, today we compare the S&P500 price action to its three previous bear markets.

 

The following chart rebases the S&P500 from previous market tops, which enables us to compare these historic periods to see if current price action tracks it in real-time. So far the decline from the 2018 highs is eerily similar to the 1987 and 2007 tops, and may be fast approaching a stage where it needs to carve out its own route.

Interestingly the tops of 1987, 2000 and 2007 all veered towards a -10% decline (the minimum threshold to be classified as a correction) before bouncing higher with various degrees of success. But, more importantly, we note that it is following a ‘recovery’ after a 10% decline that each top has shown its own character. We think we’re at that stage about now.

 

Whilst the 1987 crash was as short and sweet as a bear market could be, the 2000 and 2007 declines varied greatly in terms of speed and time which can be clearly seen on the next chart. The prior three bear markets all have unique price action features and could be labelled as winners in their own right: 1987 is the fastest bear, 2000 is the longest-distance bear and 2007 is the biggest bear. So, if the S&P500 is about to embark on a bear market, we’re intrigued to see which bear camp it falls into.

Whilst the S&P500 ponders its next move (up, down, how far and how quickly) we’ve compared the S&P500 weekly chart to the prior three tops, taking the percentage fall and approximate timing into account. We think you’ll agree it certainly provides a little perspective, especially for the 1987 crash which looks like the blink of the eye compared to the others. Still, this is all hypothetical and, as outlined above, each top displayed its own characteristic from this point onwards.

Therefore, price action should be your guide to help decide whether you believe this is part of a mega top or we’ll simply bounce higher and resume its long-term uptrend. Either way, we’re sure it’ll be a key point up for discussion over thanksgiving.

Matthew Simpson CFTe,Senior Market Analyst (Asia)