The response of the market to the swift and severe correction of the last quarter of 2018 has been equally swift in its comeback. In fact, the S&P 500 in the first 67 days of trading in 2019 (as of April 9) has recorded the fifth best start of the year on record (source: Bespoke analytics):
In most cases the performance for the rest of the year continues unabated with two notable exceptions in 1930 and 1987. In 1987, the index still closed slightly higher on the year but after undergoing the grueling crash of Black Monday on October 19th.
From this angle, the 1930 experience presented a very different backdrop than the current situation and therefore it should not have much correlation to our current trading. The 1987 situation, while more similar to today’s economic backdrop, also had very specific elements to it (i.e. portfolio insurance) that probably exacerbated assets’ moves.
It would transpire that the current 2019 great start might have a better chance to retain or build on the recent gains than erase them.
However, on a short-term basis, valuations and technical may be a little overextended. One chart we like to review regularly to gauge the excesses in short term market moves is the percentage of stocks above the 50-day moving average:
(chart courtesy of www.indexindicators.com)
Currently, we can see how such percentage has been hitting extreme values which would suggest a slowdown in price appreciation.
Some confirmation of the data provided by the previous chart comes from another graph which illustrates the Put/Call ratio:
(chart courtesy of www.indexindicators.com)
The Put/Call equity ratio is a contrarian indicator built on the number of options traders exchange daily. A low ratio indicates a prevalence of calls traded (speculative, upward bias) while a high ratio indicates a prevalence of puts traded (defensive insurance, downward bias). It is a contrarian indicator because it can captures extreme positions in either direction. Currently, the ratio is rather low albeit not yet at dramatically low levels.
In conclusion, the technicals would seem to paint a picture of short-term caution and long-term positive resolution. We will keep monitoring.