“The Snake” Chart Should Put Investors on High Alert

by Richard Band | February 12, 2014 12:14 pm

Ma Yellen has every reason to be proud.  Tuesday the new Federal Reserve chair delivered her first semiannual Humphrey-Hawkins testimony in front of the House Financial Services Committee.  Like Bernanke and Greenspan before her, she uttered little of substance—just a promise that the Fed would keep its low-interest policy unchanged.  Zzzzzzz.  Yet the Dow soared 193 points, and the broader S&P 500 index tacked on a comparable 1.1%.

Don’t you wish the stock market would throw a party every time you got up and said nothing?  Truth be told, though, this is generally how Wall Street reacts to Fed chairmen’s testimony.

According to an interesting MarketWatch piece[1], the S&P gained an average of 0.78% during the 16 trips Ben Bernanke made to Capitol Hill during his tenure for the show mandated by the Humphrey-Hawkins Act.  So Prof. Yellen is actually a bit ahead of the game at this point.

What remains to be seen, of course, is whether Yellen’s babbling can actually keep the market bubbling for very long.  I’m willing to give her the benefit of the doubt for the next couple of weeks anyway, and probably through the end of April, when the market’s seasonal energy will begin to ebb.  (November through April are by far the strongest months of the year for stocks.)

More and more, however, I find myself pondering charts like this one[2].  It’s my own baby and I’ve put a lot of love into creating it.  I call it the Snake because of the way it slithers up and down.

The Snake plots the deviation of the S&P 500 index from its 14-month moving average.  To smooth the curve and make it easier to read, I take a nine-month average of the deviation.  That’s what you see here.

The striking feature of the Snake right now is the divergence we’re observing between the previous peak of the curve in April 2010 and the peak just registered in December 2013.  (Check out the blue oval at the right-hand side of the chart.)  As of the January 2014 plot, the Snake began sneaking down from that lower, secondary peak.

Visually, this formation bears an uncanny resemblance to the double top that finished off the great World War II bull market in the spring of 1946 (see oval at left of chart).  Could history be repeating itself before our eyes, with the same kind of euphoria a war-weary nation felt back then[3]?

After the May 1946 top, the S&P fell almost 29% over the following year.  As I mentioned in last Thursday’s blog, I don’t expect anywhere near so severe a setback in the present instance.

Still, I think the “rattle of the Snake” is cautioning us to be careful with new stock purchases, and to look for opportunities to reduce unnecessary risk wherever possible.  Am I on high alert?  You bet.

  1. MarketWatch piece: http://blogs.marketwatch.com/thetell/2014/02/11/can-yellen-top-bernankes-sp-500-average-gain-of-0-8-on-humphrey-hawkins-days/?mod=MW_home_latest_news
  2. this one: https://profitableinvesting.investorplace.com/wcmedia/snake_14dev_1-31-14.jpg
  3. same kind of euphoria a war-weary nation felt back then: http://en.wikipedia.org/wiki/File:Kissing_the_War_Goodbye.jpg

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