Getting a little nervous about how long the current market rally has gone uncontested? I am. At least, I was, until I actually went back and looked at previous rallies as a frame of reference.
As it turns out, things aren’t nearly as strained as you’d think.
Just the Facts
Thursday is the 35th day of what amounts to an almost 12% rally. At no point between Dec. 19 and now has the S&P 500 fallen (on a closing-price basis) more than 1%. The worst run, in fact, was the 1% dip during the last four days of January. Everything else has been up, up and more up.
Uncomfortably high and unfamiliar territory? Not so fast.
Click to Enlarge If it feels unusual, it might only be because we’re comparing it to recent memory — the September-November debacle, during which no trend lasted for more than a few days, and no trend — good or bad — traveled more than a few percentage points. Thing is, that was an unusual scenario. The rally we’re in the midst of right now is actually normal. And to start verifying that idea, we only have to go back to early 2011 — which just so happens to be the last time we were in anything close to a “normal” environment.
Click to Enlarge Between early December 2010 and late February 2011, the S&P 500 managed to log a 13.8% gain over a 59-day span. Just a few weeks before that, the index rallied continuously to a 16.8% gain over the course of 47 trading days. In the earliest part of 2010, the S&P 500 advanced 14.4% in 58 days without any serious interruptions.
Point being, we’ve seen this kind of persistent bullishness before, and not all that long ago. Based on history, there’s a good chance we’re not quite yet at the end of the line.
On the Other Hand …
While I’m a huge fan of discipline and being a stickler when it comes to applying historical context to current situations, I’m not naïve enough to ignore the fact that when you remove the crazy 8.8% bullish swing from late November and the equally crazy 4.4% pullback in early December, what you have is a much longer rally than 35 days, and a much bigger rally than just 12%.
What you have is a 16.5% rally that unfurled over the span of 51 days — right in line with the maximums of recent rally efforts.
Clearly it’s a dilemma for anyone trying to figure out just what the market’s limits are.
This technical/timing look has nothing to do with the market’s value. I’ve long believed stocks are well undervalued at their current levels, and I expect them to end 2012 higher than where they started the year. But that doesn’t mean they’ll make their way from here to there in a straight line, and I — hopefully like you — have no desire to step into new trades at a short-term top.
Click to Enlarge With that, I think I’m more inclined to start the clock at the Nov. 25 low rather than the Dec. 19 low. So again, that puts this rally at 51 days old and at a 16.5% gain, akin to the rally sizes observed in 2010 and 2011. Translation: Any gains beyond where are right now are a gift, and only take us to a higher high from which to drop us.
Yes, I know that bucks the application of the historic standard. In the sage words of Bobby Brown, though, it’s my prerogative.
The “good” news is, the market’s likely to run out of gas before it carries us too much further.