Crash Inevitable? The Stock Market Action This Year Is Eerily Similar To 2007 And The Last Time We Saw A Divergence Between Macro (Higher) And Stocks (Flat To Lower) Was Summer 2008…
December 21st, 2012
This line could set off a “major sell signal” for stocks
The stock market action this year is eerily similar to 2007.
Back then, the S&P 500 started off the year with a strong rally before a summertime correction gave back all the gains. Stocks rallied again and hit their highs of the year in October. Then we got a sharp drop in November and a rally to a lower high in December.
Stocks started off strong in 2012. Then a summertime correction gave back nearly all the gains. The S&P 500 rallied to hit its high of the year in October. Then we got a sharp drop in November and a rally to a lower high (so far) this month.
The anecdotal evidence is similar, too. Restaurants aren’t filling up anymore. And in-store Christmas shopping isn’t as robust as expected…
By the end of 2007, I turned bearish. Not because of anything mentioned above – but because the monthly chart of the S&P 500 closed below its 20-month exponential moving average (EMA).
The 20-month EMA is the line in the sand that separates bull markets from bear markets. As long as the S&P 500 is trading above the line, stocks are in a bull market. But when the index drops below the line, the bear is in control.
As you can see from the following chart, this indicator timed the bear markets of 2001 and 2008 almost perfectly…