This Dow Signal Flashed Right Before the Great Depression

The current bull market turns nine years old this week

Senior Quantitative Analyst
Mar 7, 2018 at 8:00 AM
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The current stock market rally turns nine years old this week. It was March 6, 2009, when the Dow Jones Industrial Average (DJI) hit its lowest point following the 2008-2009 market crash. There have only been a handful of times in its history that the Dow has seen this kind of rally over a nine-year period. This week, I’m looking at how stocks have performed after these rallies -- and how 2018 has been an action-packed year for the Dow, alongside another surge that was followed by a 10% correction. We’re currently sitting right around breakeven for the year, and below, I will look at similar years and see how stocks behaved going forward.

Dow Has Gained 277% Since the Start of the Current Bull Market

It was almost nine years ago to the day that the Dow bottomed after the financial crisis. Since then, the index has gained 277%, or almost 16% on an annualized basis. Historically, this is a remarkable rally, and is just the fourth time the Dow has gained this much over the course of a nine-year period. The table below shows the previous rallies and the Dow’s subsequent performance.

For some perspective, the Dow has averaged an annualized return of just over 7.5% since 1920, which is a reasonable benchmark. The returns following these rallies have been mixed, though the returns after the latest signal in 1997 were very good for the next few years -- up until the tech bubble burst in 2000. The first signal in the table below preceded the most notorious market crash in the history of the stock market: the Great Depression.

IotW Chart 1

The chart below shows how the current rally compares to the previous ones. On a positive note, the current rally mostly resembles the 1988-1997 rally, which saw the best returns moving forward. These two rallies look the most alike because they had the steadiest uptrend throughout the nine-year surge. The other two lagged behind, and then accelerated higher right at the end to catch up.

Dow chart 2

Blue Chips Could Be Headed for Choppy Trading

We’re just a few months into the year, but it’s been eventful so far. The Dow started off extremely strong through most of the first month, but then, for the first time since 2015, it fell more than 10% from its peak. Below are the years in which the path of the index most closely resembles this year's current trajectory. The years are ranked in order of how closely they look alike, and the three years with the most similar returns are positive, but very lackluster. The other two are also positive for the rest of the year, with the 1958 signal being superb with a 30% return over the remainder of the year.

Dow Chart 3

The chart below shows all of the above years along with the current one. The 1958 return requires the axis to be so broad that you don’t get a great view what’s going on.

Dow Chart 4

Taking out the 1958 signal allows you to zoom into the chart a little more, and gives a better picture on what’s going on. If this is any hint at how the rest of the year plays out, it looks like a choppy market going forward.

Dow Chart 5



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