Déjà Vu? Wall Street’s Drawing a Correlation That Might Not Exist

John DVIt’s human nature to try and draw conclusions based on what happened in the past. As they say, history does not repeat but it often rhymes.

One of the more recent topics flooding my inbox from Wall Street firms is that today – this series of volatile up and down moves, with a rally that stays up – compares to similar patterns in 1998 and 2011. In fact, if you overlay the three charts between 1998, 2011, and where we are today, they do look quite a bit alike.

In 1998 the stock market suffered a drop, then a rally, then another drop, before rallying 15.4% over the next 13 weeks. In 2011 the pattern was similar. After a succession of up and down moves, the market rallied 15.2% over the next 13 weeks.

The question is whether 2015 will look like 1998 and 2011 when the market really pops into the end of the year… or, if this time is different.

I think this time could be different. Here’s why:

The 1998 and 2011 periods had their wind at their backs. In 1998, technology stocks were leading the way. Everyone was excited about the New Economy and IPOs were often up 1,000% from their offering prices in a matter of days or weeks. The stock market was very speculative. Doctors and lawyers were quitting their practices to day trade stocks and pimple-faced kids set up shop as venture capitalists in their dorm rooms!

In 2011, a new period of quantitative easing went into effect at the bottom of the European debt crisis, and the market zoomed higher in the fourth quarter.

But today, the bull market is long in the tooth. Bull markets have averaged 39 months over the last 100 years. This one has plenty of grey hairs at 6 ½ years long.

Very few stocks are leading the way. I pointed out in prior issues that only a handful of stocks accounted for all of 2015’s gains at that point, and 20% of the stocks in the S&P 500 were down 20% or more.

The U.S. market is the second most overvalued developed market in the world based on long-term earnings trends.

The strong U.S. dollar is killing companies. Revenues are falling short of expectations and companies are often beating revenue based strictly on financial engineering. These low quality sources of earnings are what we target in Forensic Investor.

Finally, insiders are cautious. In September, about a third of insider buying was in just one stock. That’s hardly an endorsement from the people inside the company that have the best handle on their prospects.

So I think this time will be different. It’s best to include some insurance in your portfolio to guard against further declines.

John Signature

John Del Vecchio
Editor, Forensic Investor

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Categories: Stocks

About Author

In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.