Technical Analysis: Market Insight

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1 Technical Analysis: Market Insight October 1987 vs. October 2017 Today (Oct. 19, 2017) marks the 30 th anniversary of Black Monday a global market crash during which the S&P 500 dropped 20% in one day. This note looks at a couple of the differences between now and then. One key difference between 1987 and 2017 is the disparity in S&P 500 returns. In 1987, the S&P was up 33% year-to-date into October. This year, the S&P was up 12.5% year-to-date into October. Internal breadth marks another distinction between 1987 and In 1987, the NYSE Advance-Decline line peaked in March and did not make a new high with the S&P 500 in August indicating that fewer stocks were participating in the rally. We ve found that such evidence of narrowing breadth is a common characteristic of a market top. Currently, the NYSE Advance-Decline line has confirmed the S&P 500 s latest price high. We think this signal of broad-based participation argues against a major top. Ari H. Wald, CFA, CMT Technical Analysis (212) ari.wald@opco.com For analyst certification and important disclosures, see the Disclosure Appendix. Oppenheimer & Co. Inc. 85 Broad Street New York, NY Tel: Fax:

2 October 1987 vs. October 2017 One key difference between 1987 and 2017 is the disparity in S&P 500 returns. In 1987, the S&P was up 33% year-todate into October. This year, the S&P was up 12.5% year-to-date into October. S&P 500 Year-to-date gains going into Oct were more than double the gains going into Oct = Dec. 31, 1985 = Dec. 31, 2015 Source: Oppenheimer & Co. and Bloomberg. Note: These results cannot and should not be viewed as an indicator of future performance. 2

3 Narrowing Internal Breadth in 1987 Technical Analysis Internal breadth marks another distinction between 1987 and In 1987, the NYSE Advance-Decline line, a cumulative count of advancing issues net of declining issues, peaked in March and did not make a new high with the S&P 500 in August. This is called a bearish divergence and indicates that fewer stocks were participating in the market s rally. We ve found that such evidence of narrowing breadth is a common characteristic of a top (page 5). NYSE Advance-Decline Line (ls) 1987: Participation had narrowed in August vs. March S&P 500 (rs) The NYSE Advance-Decline line did not make a new high with the S&P 500 in Aug a 5-month divergence Source: Oppenheimer & Co., Guides to the Financial Markets: Charles H. Blood, Jr., CFA, and Bloomberg. 3

4 Broadening Internal Breadth in 2017 Currently, the NYSE Advance-Decline line has confirmed the S&P 500 s latest price high. We think this signal of broad-based participation argues against a major top, and accordingly indicates that pullbacks should be bought. For trading levels, we see support at the S&P 500 s 50-day m.a. (~2492). The NYSE Advance-Decline has confirmed the S&P 500 s Oct high arguing against a major top, in our view NYSE Advance-Decline Line (ls) S&P 500 (rs) Source: Oppenheimer & Co., and Bloomberg. 4

5 Internal Breadth Peaks Ahead of Price The internal divergences that occur around a major market top are usually measured between 3-6 months, in our view. The NYSE Advance-Decline line peaked before the S&P 500 in 11 of the 14 major market tops since We ve found that the median duration between the peak in breadth and the peak in price has been 6 months. Internal breadth peaked coincidentally or after the S&P 500 in 1953, 1976, and 1994, and the subsequent peak-totrough decline was 15%, 19%, and 10%, respectively. Breadth peaked at least a year ahead of the S&P in 1968, 1973, 1980, and 2000, and the subsequent declines were 36%, 48%, 27%, and 51%, respectively. Note that longer divergences were followed by larger declines. NYSE A-D Line Peak S&P 500 Cycle Peak Duration between Peaks (months) % Change between Peaks Subsequent Peak-to- Trough Decline Mar-53 Jan % -15% Mar-56 Aug % -22% Mar-59 Aug % -14% May-61 Dec % -28% May-65 Feb % -22% Aug-67 Nov % -36% Apr-71 Jan % -48% Jul-77 Dec % -19% Sep-78 Nov % -27% Mar-87 Aug % -36% Sep-89 Jul % -20% Jan-94 Jan % -10% Apr-98 Mar % -51% Jun-07 Oct % -58% Median % times Breadth peaked before Price Market Tops: Internal Breadth vs. Price -6 5% -25% Source: Oppenheimer & Co., Guides to the Financial Markets: Charles H. Blood, Jr., CFA, and Bloomberg. Note: These results cannot and should not be viewed as an indicator of future performance. 79% Technical Analysis 5

6 Disclosure Appendix Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. The published date of the recommendations contained in this report can be found by accessing disclosures ( This report was produced at 10:00 EDT and disseminated at 10:00 EDT. Analyst Certification - The author certifies that this investment strategy report accurately states his/her personal views about the subject securities, which are reflected in the substance of this investment report. The author certifies that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this investment strategy report. This technical research report is provided by Oppenheimer & Co. Inc. ("OPCO"). Technical analysis is the study of price and volume and the interpretation of trading patterns associated with such studies in an attempt to project future price movements. Technical analysis does not consider the fundamentals of the underlying corporate issuer and may offer an investment view that may appear inconsistent with other research generated by OPCO. This report does not constitute research regarding fundamental financial information. The investments discussed in this report may not be suitable for all investors. The overview in this report is provided for informational purposes and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security or investment advisory services. The report is not intended to provide personal investment advice. Investors should use the analysis provided by this report as one input into formulating an investment opinion and should consult with their Financial Advisor. Additional inputs should include, but are not limited to, the review of other research reports generated by OPCO, and looking at alternate analyses of the underlying corporate issuer. With respect to any specific company discussed herein, allow this report to serve as both an initiation and termination of coverage. Given the nature of technical research, such company may or may not appear in future reports for a variety of technical reasons. Securities and other financial instruments discussed in this report or recommended or sold by OPCO are not insured by the Federal Deposit Insurance Corporation and are not deposits or obligations of any insured depository institution. Investments involve numerous risks including market risk, counterparty default risk and liquidity risk. Securities and other financial investments at times may be difficult to value or sell. The value of financial instruments may fluctuate, and investors may lose their entire principal investment. Potential Conflicts of Interest: Technical or strategic analysts employed by OPCO are compensated from revenues generated by the firm. OPCO generally prohibits any analyst and any member of his or her household from executing trades in the securities of a company that such analyst covers. Additionally, OPCO generally prohibits any analyst from serving as an officer, director or advisory board member of a company that such analyst covers. In addition to 1% (or more) ownership positions in covered companies that are required to be specifically disclosed in this report, OPCO may have a long positon of less than 1% or a short position or deals as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon and makes a market in the securities discussed herein. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest. Additional Information Available 6

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