Monday, August 25, 2014

Crossing SPX 1000 in 1998 vs SPX 2000 Today

The S&P crossed above 2000 for the first time Monday.

This brings to mind 1998, the year the S&P crossed above the 1000 milestone.

The 1990s are wrongly remembered as a period in the market where volatility was uniformly low and double digit annual gains came in easy succession. The crossing of the 1000 milestone is a case in point.

SPX first came within 2% of 1000 in early October of 1997. In the month before, it had risen over 9%. After attempting to close higher for 3 weeks, SPX instead dropped over 10% in late October. So much for low volatility.

It was back near 1000 by early December, 1997. It again failed to close higher and dropped 6% by the end of the month.

It was back near 1000 in early January, 1998. Once again it failed, falling more than 7%.

It was back at prior highs a 4th time in late January, 1998. And it fell 3%.

On February 2, 1998, four months after it first attempted to cross 1000, SPX succeeded in a way that will ring a bell with many: it had an overnight gap up of 1.8%. Even in those days, an overnight gap up worked best as a way to get through stiff resistance.

Once it cleared 1000, SPX rose 8 of the next 9 weeks, gaining 13% in two months.

Today, everyone remembers that SPX rose more than 20% every year for 5 years in a row.

What is left forgotten are the long periods where SPX chopped, fell and consolidated before moving higher. These were a hallmark of the 1990s rally, important periods were investors were shaken out, setting up the next move higher. The low volatility and easy gains of the period are a myth.

SPX made no net gains for 8 months in 1996 and for 16 months between mid 1997 and late 1998. In 1999, year to date returns were negative as late as October.  It was nothing like the smooth ascent investors have experienced the past 3 years.

Which bring us back to the present market.

SPX first came within 2% of 2000 in late June. It fell 4% after its first attempt and it succeeded on its second attempt. Not very similar to 1998 and the crossing of 1000. Imagine if SPX had reached 1960 in May, June, July and August, falling in-between to 1760, 1840, 1820 and 1900 before finally crossing 2000. You can see why a rapid run higher in the next two months might take place. That was the set up in early 1997.

The current market resembles 1997-98 in at least one respect: almost 70% of the gain in SPX the past two weeks has come via overnight gaps, the remaining third during cash hours.