I am seeing more and more traders I respect starting to compare the price action in 2013 so far to the price action in 2007. In fact, the two best “analog” traders who I have followed for many years have both brought up the comparison in the past week.
First, Corey Rosenbloom at AfraidtoTrade.com has a great chart illustrating the similarities in the run up from 2003 to 2007 to the current run from 2009 to 2013:
Corey goes on to explain how the end of the 2007 pattern piqued his interest. I’ll leave it in his words:
While the 2003-2007 period had smaller monthly retracements, the present bull market had steeper but fewer retracements in the earlier phase of the recovery (new trend).
Toward the end (or at least the end of the 2007 period), both bull markets experienced large upward swings compared to more frequent small or shallow retracements.
It’s this “end of the 2007″ period that grabbed my interest, specifically with respect to the structure of the present rally.
Toward the end of the 2006 period, the Bull Market continued with sustained upswings that lasted throughout 2007.
Our current Bull Market also developed strong sustained upward movement through 2012 and of course the present 2013.
While there’s absolutely no expectation that two bull markets will be identical, we can compare their larger similarities, particularly in terms of structure (sequence of highs and lows), distance of swing, and periods of uptrend continuation or counter-trend retracements.
If we look at the current message from 2007, we see a potential pathway for price according to a historical similarity or repeat phase.
I’m focusing my attention on the early 2007 retracement when compared to the late 2012 retracement period, both of which were followed by a sustained, week-over-week rally.
The comparable pro-trend swing from late 2007 rose 188 points while the current swing has traveled 244 points and climbing.
For a long-term perspective, here’s what Erik Swarts of Market Anthropology wrote yesterday:
As the aromas of disinflation waft through the system and into the bond market, we noticed that the UST:SPX ratio has shown some structural and momentum similarities to its cyclical pivot in 2007.
Buttressing this perspective is the silver:gold ratio’s massive and cascading disinflationary divergence, which was also present during the 2007 timeframe.
Erik has taken a slightly different approach, comparing the ratio of 10 year Treasuries to the S&P 500, a proxy for investors’ preference for bonds vs. stocks. That preference has shown a similar path to mid-2007. At the same time, the ratio of silver vs. gold, another potential indicator of inflationary appetite, has declined today in a similar fashion to 2007. So Erik is on the lookout for a similar, sharp downward resolution in the S&P 500 – a quick move out of stocks, into bonds, as happened in 2007:
I have followed both Corey and Erik for many years, and they’re both quite astute at recognizing patterns to develop potential “what if” scenarios. Analogs are not hard and fast guides – rather, they’re potential road maps that can be used with a much broader set of indicators.
My first interest in analogs began many years ago after watching the documentary of a young Paul Tudor Jones explain his use of a 1920’s analog to trade extremely well ahead of the months leading up to the 1987 crash. Here’s a link to the full video. It’s a gem for trading aficionados. One last key note on analogs though – many turn out to be wrong. But they’re a tool just like any other, and a valuable tool at that.