What Are The Historical Patterns Saying

August 5, 2015 | Print View

Between November of 2013 and February of 2014 a frightening chart of the Dow Jones Industrial Average was circulating through investor ranks. The chart superimposed the current market (red line) on top of a chart from 1928 and 1929 (black line). See the chart below:

The picture wasn’t pretty and insinuated that a correction was imminent. Thankfully the correlation broke and the Dow Jones ran from its February 2014 levels of 15,500 to north of 18,000 for a 15%+ gain.

Recently, more of these overlay charts are starting to make the rounds as the overall market chops around. I don’t put a lot of predictive faith into these charts, but they’re fun to examine. Let’s look at a few of them.

The chart below is an overlay of the Shanghai Composite Index in China (white line) vs the Dow in 1929 (gold line). As we see, the crash in the Shanghai Composite appears to be somewhat mirroring that of the 1929 crash in the Dow Jones Index. The implication here is that we still have more pain to come in the Chinese markets before we can call a bottom.

If the markets around the world are sluggish maybe we want to look at buying gold. Gold has been a tough asset class as of late. It peaked in 2010 around $1,800 an ounce and has been falling ever since to around $1,090 today. But that doesn’t worry some gold bulls who feel we need this correction before we can take off again. They use the overlay chart below that compares the gold chart of the 1970’s (gold line) to the gold chart of today (green line) as evidence.

Finally, if we’re feeling bullish I’d really encourage you to embrace the chart below. It overlays the S&P 500 today (blue line) with the S&P 500 in 1904 (orange line). In the first half of 2015 the S&P 500 did something it hasn’t done since 1904. It posted two consecutive (back to back) quarters of 0% gains. This has happened only once (1904) in the past 125 years for either the Dow or the S&P 500 and afterwards the market rose over 40%. See the overlay chart highlighting this below:

These are all interesting charts to ponder, but at the end of the day we’re letting the fundamentals drive our forecasts. We’ve forecast a flattish year in 2015 with growing optimism in the economy and corporate earnings growth as we enter 2016. Right now we don’t see any reason to change the forecast, but we’re in the back half of 2015 and soon the market will start to price in what’s expected in 2016.

As of August 4th, 2015:

Dow Jones US Moderately Conservative Index is up 0.70% (TR) for the year

S&P 500 closed at 2,093 up 2.84% for the year

Russell 2000 closed at 1,228 up 2.72% for the year

U.S. 10 year Treasury Futures are yielding 2.27% up 0.09% for the year

WTI Crude Oil futures closed at $45.55 down $8.16 for the year

Gold closed at $1,089 per ounce down $94 for the year

To expand on these market reflections or discuss other portfolio strategies please don’t hesitate to reach out to the Gradient Investment team.