Today, I’ve written a longer blog. I hope you find the time it takes to read it enlightening. I’d like to look a bit closer at the last two major stock market crashes. Specifically we’ll look at the 2000-2001 crash and the 2008-2010 crash. Are there any patterns in these crashes that might offer clues to how this one might play out?
9-11, Tech bubble. Two for the price of one!
The 2001 crash began with an overbought, over concentrated (tech stocks) and overvalued market looking for a reason to fall. One of the primary triggers of the crash was the failure of Nortel – the must-own poster boy that had lead the tech charge during the final 5 years of the bull market. During the early 1990’s, it was a pretty “normal” bull market. In the 1990’s, we got new clients who didn’t like their GIC returns at the banks. They were buying mutual funds and stocks – we called our prospective clients “GIC refugee’s”.
When Bell split Nortel out of its holdings, the company started posting fantastic earnings growth. Clients who were normally conservative investors wanted in on that stock, and its kin. I had a diversified approach at the time. Yes, I had Nortel. But I also held “safe” stocks like Canadian banks, US consumer staples and utilities. These stocks literally didn’t move. Some went down due to moneyflow into the tech sector. Clients didn’t care for that diversification into non-rising stocks – it didn’t matter that they were good companies with actual earnings, unlike the fast rising tech stocks. I had clients literally order me (I wasn’t a discretionary manager, I was an Investment Advisor) to sell those stocks and buy additional tech stocks of all types. Of course, the market peaked and stocks fell. At first, the defensive stocks like those banks etc did hold their own. Just like the current market up until 2 weeks ago, when bonds and gold etc held their own.
But then came some gasoline to stoke that fire. Note the period in September 2001. Until then, the market was selling off with peaks and troughs, as seen by my first circled section on the chart. The terrorist acts of 9-11 changed that from an orderly bear market into a limit-down (NYSE and TSX limits came in, just as they have lately) crash. Just like today, gold etc sold off. Nothing was safe.
Markets rebounded off of the lows of the 1998 Asian-contagion selloff (horizontal line on the chart, noted by the right-most circle). That rebound lasted a few months – until it washed out again and bottomed July 2002.
Another two for one sale: The banking collapse & oil crash of 2008-2009
Does anyone recall what WTI oil was trading at in 2008 when peak-oil theory (the failure of energy production to keep up with demand) was thought as factual? Do you remember what happened after that? The chart below shows you how oil fell from $145 to $35. Um, that was big. Shale production came onside which added to supply. Plus there was that annoying recession brought about by the sub-prime mortgage crises and banking collapse reducing demand. So down it fell.
Here’s the SPX in 2008/9
Note that in 2008, the market battled with the oil meltdown just like today. It also watched Lehman fold, and other banks survival-merging (Merrill, etc) or being bailed out. “Too big to fail” was the lingo. Just like in 2001, we saw limit-downs on the market. And just like in 2001, we saw support come in at a prior low point – noted by my horizontal red support line going back to 2003. Finally, just like in 2001, it bounced, then failed and formed a candlestick reversal pattern (bullish engulfing) before moving into the most recent great bull market. Head & shoulders complex bottom that time.
Commonality: Both times we had a one-two punch of terrorist attack / oil falling – and a market catastrophe (tech bubble/ banking collapse). Both times we had former support from a couple of years prior giving us a tradable rally. Both times we got one final lower washout after that tradable rally, then back to our regularly scheduled bull market programing. Sorry for the inconvenience, folks.
Two for one sale of 2020: Oil and Coronavirus
Coronavirus has had a massive impact on our lives and on the economy. Today, my lovely assistant Cindy asked me if I can draw conclusions from the prior two crashes, given how everyone is closing stores etc. I told her that every crash is led by something different, and its always feeling like you cant compare this to other times. Its true that this is different. But so was 2001. I mean, we became involved in a terrorist war that was on our home soil. We’d never experienced anything like the twin towers coming down. It couldn’t happen here, could it? It did!! Your neighbor could be the guy who you see put his garbage pail out like you do on Friday, then blows up the CN tower the next day. You cant fight an unseen enemy. Or so we thought. Plus, the largest capitalized stocks in the world (tech) fell about 80%!!!!!
In 2009 we witnessed something we’d never seen before. Like in 2001, it was different. The banks were collapsing. I mean, collapsing!!! People were walking away from their houses and declaring bankruptcy. Your house went from the rock-solid investment to an unsalable asset unless you sold at half price from the year prior. Major recession. And then oil went from $145 to $35–an 80% meltdown (which has never been fully recovered).
In both cases, and in the current market- it was differing circumstances, never seen before. But human nature remains the same, market participants react the same. And then, things get better. Lets look at the current chart patterns for comparison to see when we might get the tradable rally like in 2001 and 2009. On the chart below, I’ve noted that, so long as 2350 is held by the SPX in the next few days, we’ll get that tradable rally. The 2350 support, like in prior crashes, comes in at a support level from a prior selloff – in this case, December 2018.
If the SPX holds 2350 for the next week, ValueTrend will step in for a tradable rally. It wouldn’t surprise me to see 15% or more upside – possibly back to that 2600-2700 area of prior support. Wait before acting. This level must hold. Thereafter, I’d be surprised if we didn’t have a final washout, based on prior patterns. But that washout wont likely last long. I’m looking for a lifetime opportunity to trade that final washout for massive profits. But this is now, and the best strategy for our way of doing things is to play a rally after evidence of 2350 holding, then see what happens.