Historical Analogs: Early ’90s Vibe

• Posted by DynamicHedge
• on January 8th, 2014

 

We’ve had a long love affair with historical analogs. Perhaps more than any other form of analysis they can provide a true perspective about where you are and where the market might be going. They can never give precise entry and exit — and that’s not the point. The point is to establish your bearings and anticipate what might come next. More than anything, analogs provide clues to look out for as the market unfolds in real-time.

In order to get an idea of how the market might proceed, we ran the 2013 $SPX chart through our pattern recognition algorithms and searched for patterns over the history of the S&P 500 that matched. The output shows the pattern that matched and the ensuing price action afterwards. IMPORTANT: The red circle near the center of each graph is the marker between the pattern that matched and the price action after.

Here is last year:

 

The first set of matching patterns is the most dominant in the data set. They have a couple things in common — after the pattern plays out there is negative performance in the first half year, followed by a resumption of rally.  All but one reached new highs in price within one year time horizon.

1993:

 

1992:

 

2010:

 

2009:

 

The second most dominant set of patterns is even more bullish than the first. These analogs are less precise matches, but they’re just as important. The takeaway here is that bull markets do not have to fit into our definition of normal. A pause at current levels or higher can still precipitate higher prices still. I’m not saying this is what WILL happen, but it proves there is a precedent for this type of price action. If this is the path the market chooses, it should be respected.

1985:

1988:

 

 

 

Read also:

Historical Analogs (July 21, 2012)

Choose Your Own Adventure: SPX 2013 (March 4, 2012)

 

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