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 2017. 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) 667-5279 ari.wald@opco.com For analyst certification and important disclosures, see the Disclosure Appendix. Oppenheimer & Co. Inc. 85 Broad Street New York, NY 10004 Tel: 800-221-5588 Fax: 212-667-8229
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. 1987 were more than double the gains going into Oct. 2017 1986-1987 2016-2017 100 = 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
Narrowing Internal Breadth in 1987 Technical Analysis Internal breadth marks another distinction between 1987 and 2017. 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. 1987 a 5-month divergence Source: Oppenheimer & Co., Guides to the Financial Markets: Charles H. Blood, Jr., CFA, and Bloomberg. 3
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. 2017 high arguing against a major top, in our view NYSE Advance-Decline Line (ls) S&P 500 (rs) Source: Oppenheimer & Co., and Bloomberg. 4
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 1950. 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-53 2-1% -15% Mar-56 Aug-56-5 2% -22% Mar-59 Aug-59-5 7% -14% May-61 Dec-61-7 7% -28% May-65 Feb-66-9 4% -22% Aug-67 Nov-68-16 13% -36% Apr-71 Jan-73-21 16% -48% Jul-77 Dec-76 7-5% -19% Sep-78 Nov-80-27 32% -27% Mar-87 Aug-87-5 13% -36% Sep-89 Jul-90-10 4% -20% Jan-94 Jan-94 0 0% -10% Apr-98 Mar-00-24 36% -51% Jun-07 Oct-07-4 1% -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
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