Will the markets enter a macro sideways phase?

July 22, 2022No Comments

Hello, and welcome to the Smart Money, Dumb Money Show. And I am your host as usual, Keith Richards, I’m the president and chief portfolio manager at ValueTrend Wealth Management and I am a technical analyst. And today we are going to take a trip back in time. In fact, we’re going to go back 100 years because I happen to have a time machine in my office and it’s called StockCharts. And it can bring us back to the Dow Jones Industrial Average when it was just incepted at the very late 1800s. In fact, I’m going to give you data from 1900 on and what I’m going to be introducing is a premise that I introduced relatively early in my career in January of 2021. Now, at that point, I had been in the industry for about 11 years. I began in 1990 and I had been a technical analyst for probably five of those years.

I began studying technical analysis and it was in 2001 where I got my CMT, chartered market technician designation. Now I was one of the very, actually sorry, it was in 2002 when I was officially awarded the designation. Now I was one of the original pioneers in Canada to get the CMT designation. There were very few of us in Canada that had their CMTs at that time. In fact, I was told by the Market Technicians Association, at the time that I was something like number 40 in the country to get their CMT. So I was in a pretty small little group. And at the time I recall not much attention was being addressed to technical analysis, although it was improving by 2001 because of that crash. So I wrote an article and it was called “Bull, Bear or Neither.” And it was published in the Canadian MoneySaver.

And I get to brag that I was, at least from what I saw, the very first writer and analyst to predict that the market that had peaked in 1999 would enter into a prolonged sideways period, and in fact, it did. As we know from 2001, there was a market crash. The market did recover, but the market only retrieved its old highs of 1999. And that didn’t happen until 2008 or so. And then it crashed again and we really didn’t emerge into a true bull market until 2013. So we’re going to look at that plus other sideways periods and we’re asking ourselves today, could we be entering into another one of these prolonged macro cycles of sideways markets that I originally predicted back in 2001? So let’s take a look now, before I get into the charts, I want to mention that if you are a subscriber to the ValueTrend equity newsletter, so it’s called the ValueTrend Update and you could subscribe to our newsletter online at valuetrend.ca.

And if you subscribe, in about two or three weeks, you are going to be receiving in your inbox, a very comprehensive, analytical review of the macro trends on the stock market and how these trends and periods of sideways markets and whatnot affect how you invest. So I really do encourage you that if you don’t subscribe to our newsletter right now, you should do so because I’m going to give you a tidbit of that research paper that Craig and I are putting together. It’s going to include my technical work and Craig’s fundamental work. I think you’ll find it very, very enlightening. And I think that it’s worth everybody’s attention to get a copy of that paper, which will be specifically on our ValueTrend update newsletter. So can’t emphasize enough, you need to get subscribed to the newsletter so, in a couple or three weeks, you get a copy of this research paper.

It’s kind of one of those life-changing research papers, I believe. Just like my outlook in 2001, January 2001, was most definitely something that had people listened, would’ve been very, very enlightening and hopefully profitable.  This is going to be a look at the past hundred years on the market and ask the question, are we going to enter into a sideways market? So this was the chart that I put up in 2001.

Now, obviously, it didn’t have data to 2022 that we have here, but you can see that there have been many periods. So this is the Dow Jones Industrial Average, and this is the year 1900 right here. And you can see that there have been different periods where the markets really don’t make new highs and they can last many, many years. In fact, between ’05 and ’25, I believe it was, that was about 20 years of sideways markets where the market could not cross approximately 100 on the Dow. Just think, the Dow was stuck at 100 and it had lots and lots of volatility if you look at the swings in there. The same thing, I mean, there was the Great Depression and the crash, but that really wasn’t a sideways market.

So the next sideways market appeared after the Great Depression. And it really, you know, it was a rally after the Great Crash of ’29-’30. And there was sort of a peak that occurred around ’36 and really didn’t break until around 1950. So again, 15 years, a bull market that lasted 16 years, a sideways market. Now this one was the one I referred to the most when I did my article for the MoneySaver back in 2001. And I was talking about how really it was between ’65 and ’82 where the market moved sideways for 17 years. And the Dow was so precise. It kept hitting 1000 and breaking down. So here we had 1000 as a ceiling, here we had 200 as a ceiling, and here we had 100 as a ceiling, approximate round numbers. We had a bull market of 16 years. A bull market here of 17 years. So pretty close to the same length of time when you think of this 15, 17 years, and even the sideways market that occurred between the tech bubble in 2000 and the crash in 2008, the sideways market here took 13 years. So we are now eight years into the current bull market and we are not yet seeing signs of that sideways market that we saw back here and here and here. But the question came up by one of the readers of my blog.

Do you think that we’re going to enter into a sideways period rather than just a straight-up bull market? So I answer that question, as I said, in full on this research paper that Craig and I are just in the final stages of putting together and hopefully you’ll get it if you subscribe to our newsletter. But in a nutshell, it would be interesting to see if we do go into a sideways period because we’re really only eight years into a bull since the breakout in 2013. Now, one of the other things I want to show you is that you might say, well, this wasn’t a sideways market, look the Dow put in a new high, whereas here it obviously didn’t and here it didn’t and here it didn’t, but this time it did. So why are you calling that a sideways market? And I’m going to say it’s because the Dow was pretty concentrated in a few stocks that happened to do all the lifting in the 2008 crash.

So there were energy stocks in particular. So if we look at the S&P 500, exact same period, you can see that the peaks were identical. And that’s why, even though this chart does not show identical peaks, I still call it a sideways market because of the S&P which was not as heavily weighted in oil, and a couple of other sectors did have, like literally, identical peaks at around 1500. Okay? So I think it was 1500 or 1600, pardon me? My memory fails me here, but whatever the case, sideways markets occur. They occur after extended bull markets and those bull markets in the past have been something like 16 or 17 years. We are 18 years into the current bull so that could be an argument that there is more upside to go.

Now I’m just gonna make a suppose because the reader asked me, do you think we could enter into a sideways market? In the research paper, that I’m going to send out to readers of the newsletter, we present some fundamental and technical thoughts as to why it’s a possibility. I am not making a prediction here. Please underline that word. It’s not a prediction. It’s just a possibility. In fact, if history guides us, it’s not likely to happen, and we should re-enter into a bull market based on timeframe. But let’s assume that we do move into a sideways market. The way you’ll be able to tell is if the market finishes its washout. Now, some of you have been watching my videos and reading my blogs and know that I am suggesting that the S&P 500, which is this chart, has the potential to go somewhere between 33 and 3,500.

Okay. You can see where that comes from. Here’s the 3,300, which is this old support level down here. Here’s the 3,500, which is this old support. So remember old support comes becomes new resistance, but it also can end up being next-level support if this level is cracked. So 3,500 then 3,300, somewhere in there is where I am suggesting the market could reach. Now we’re in a bit of a rally right now, and you can see that on this chart, but let’s assume it falls to here, or even if it does decide to discontinue its bear market now, I wonder, but let’s see. So let’s assume that one of those two scenarios happens that the market stops going down at some point in the next few months, and then if it starts, it moves back up to the top of the range, what we’re going to have to watch is the old highs.

So the old highs on the S&P were around 4,800. I like using round numbers. You know, don’t worry about the more precise numbers on the S&P that we’re targeting here. So roughly 3,300 would be in the basement and roughly 4,800 would be the ceiling. If the ceiling of 4,800, or thereabouts, is cracked significantly to the upside, then we’re in the bull market. End of story. The sideways market is not going to happen. However, if the market hits around 4,800, could overshoot it a little bit, but if it hits around 4,800 and then declines significantly, you have a pretty good technical argument that we are moving into a sideways period. Now, there are some fundamental arguments that might support that too. And we’re going to present that in the paper.

However, Craig and I are not predicting a sideways market. We’re just wondering at this point, because as my favorite quote of all time, comes from Howard Marks and he says, “You can’t predict, you can prepare.” And I really do believe in that. So we’re prepared that should the market finish its bear market, which is step one, we’re in the bear market right now, but it’ll end at some point. And when it’s ended, then what’s it going to do next? And if it breaks through the old highs, then we have the makings of a brand new bull that could last another eight years or not. We shall see. Don’t predict, just prepare. Have this in your mind, rather than posture making a prediction. So just as a quick summary, we’re going back to the early 1900s. There have been four sideways periods on the Dow and the S&P. The S&P wasn’t around in the early 1900s.

The Dow was unable to penetrate above 100 for 20 years between 1905 and ’25. It couldn’t penetrate approximately 200 for 15 years, between ’35 and ’50. Oops. And it couldn’t penetrate around 1000 between ’65 and ’82. Okay, for 17 years. And finally between the tech bubble peak and 2012. Now really everybody said, well, the market bottomed in March of ’09, but that wasn’t the breakout that I required to enter into a new bull market. So the breakout didn’t occur until 2013 after the ’08-’09 crash. So we saw a new high in August of 2013 at 11,000, roughly, I like using round numbers, approximately 11,000 was breached on the upside in 2013. So that again, you know, was 13 years. So these sideways periods can last a while if we enter into one. But my final comment was recent bulls lasted 16 to 17 years, and we’ve only been into this one for eight years.

So I’m not making a prediction that this is going to be the shortest bull market in history. It’s not likely going to be so. There’s a decent chance for a bull market to emerge, but you do need that 4,800 to ultimately crack to the upside before we can be confident that we are in an actual bull and not one of these prolonged sideways periods that history has shown us do occur. So don’t write off the potential of a sideways market. Thanks very much for watching. I hope you got something out of that. And, again, for the billionth time, I encourage you to subscribe to our newsletter and you will get a copy of a very comprehensive research report on this subject, including all the good fundamental stuff that Craig’s going to write. Okay? Thanks for watching. We’ll see you next week.

 

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