As students of stock market history, we’re always on the lookout for past occasions when the market looked similar to the current environment. These similarities can give us a heads up as to what’s most likely to occur going forward. Obviously, no two periods are exactly alike, but history does rhyme, especially in the stock market.
With that in mind, let’s take a look at the market action in the 1980s, specifically the 1983-1984 timeframe. Back in the 1970s and early 1980s, remember, the market was in a “secular bear” phase—i.e., the major indexes didn’t make any net progress (for 12-16 years, depending on the index) as both inflation and interest rates were high and investors turned wholly pessimistic on stocks.
In 1982, the secular bear ended with an incredibly strong rally that took the S&P 500 to new all-time highs during the following year. But starting in mid-1983, stocks began a long sideways phase that looks a lot like the past 15 months we’ve experienced.
Specifically, that 1983-1984 decline fell a maximum of just 14.8% over about 11 months, then had a strong up-thrust that caused all sorts of blastoff indicators to flash green. However, instead of surging from there, the S&P 500 meandered sideways for another five months in an even tighter range (about 6% from high to low) before finally exploding higher—the market doubled by late 1987!
This all lines up pretty well with what we’ve seen over the past few years. The S&P 500 broke out of its own secular bear phase in 2013 (hitting new all-time highs after 13 years of no net progress), but after topping in May 2015, the index fell a maximum of 15.2% over about eight months. After a rebound, we saw the ultra-powerful post-Brexit surge higher, which caused a few blastoff indicators to flash green.
It looked like the stock market was ready to get going, but instead, the S&P has been confined to a super-tight range—just 3.6%, in fact, during the past three months. No two periods are exactly alike, but the similarity of these two periods—from the breakout from a secular bear phase, to the long, tedious decline, to the short, powerful upmove, to yet another tight trading range—is striking.
We currently believe the odds favor the next major market move being up, mostly because of our bullish Cabot Trend Lines and Two-Second Indicator, as well as poor investor sentiment and other factors. And the 1983-1984 precedent, which led to a monstrous run during the following two and a half years, lines up pretty well with that thinking.