The Bank Index of today is similar to the chart of the Dow Jones Industrial Average during the Crash of 1987.
Friday's action did not change the indicators in any meaningful way. Sure the S&P 500 was up but breadth was slightly negative for the fourth straight day. That means that divergence carries on. The McClellan Summation Index, which in my estimation tells us what the majority of stocks are doing, halted its uptrend but hasn't really rolled over yet.
As I was staring at charts over the weekend, it struck me how similar the chart of the Bank Index of today is to the chart of the Dow Jones Industrial Average during the Crash of 1987. Oh don't worry, I am not going to do one of those analogs where I lay one on top of the other because as I often joke for some reason all those analog charts end up in a 1929 crash. Also, I don't even know how to do that!
But when the pattern is so similar it is worth exploring. The Crash of 1987 came from a lower high. The market was already down around 10% by the time that fateful Monday arrived. You can see it clearly on the chart. Now take a look at the Bank Index. While the climb upward is different (thus why analogs are so hard to do) notice that there was a peak in early February, a correction and then a pathetic rally in late February. And then the collapse occurred.
In both cases, we had the initial bounce off that crash. In 1987, approximately five or six weeks after the crash the Dow (the S&P as well) broke that small uptrend (blue line). But look what happened: all it did was test the crash low, about six weeks after the crash.
Now look at the Bank Index today. It had a bad time of it last week, and it has a very short-term uptrend line (black). I'm wondering if it breaks that line, maybe it turns out to be similar to that retest of the 1987 lows.
One last thing to notice: there was no V bottom but rather a lot of ups and downs with a slight upward bias. If you look at a chart of 1988, you'll see the market had a lot of ups and downs but the general direction was up. As I wrote back in March, there was an earthquake and now we live with the aftershocks of it.
Then there is the current sentiment environment. Folks keep citing the Commitment of Traders report and the CTAs but they also cite surveys taken by the investment banks and CNBC and such. This weekend Barron's released the results of their Big Money Poll. The headline says folks are bearish and they like bonds more than stocks. Yet I delved into it, and I discovered that the outlook for stocks for the next 12 months shows 36% bullish and 28% bearish. My math says that's more bulls than bears.
Then it asks which asset class will return more in the next 12 months. I believe here's where the headline comes from: 48% stocks, 52% bonds. But wait there's more.
When asked what their current asset allocation is we find they have 62% in stocks and 21% in fixed income. If you are scratching your head, join the club. So when asked what their outlook is, they like bonds more than stocks but when asked how they have allocated their money, they clearly like stocks more than bonds - by a lot.
I could go on about the details of this survey but my conclusion is they might be talking bearishly but they are not necessarily positioned that way.
