1982 vs. 1974

There is no doubt been some aggressive price action over the past two weeks in the broader market. So much so that this October is off to the third best start of any, trailing that of ’82 and ’74. In 1974 the SPX had a 14.5% gain in the first two weeks and went on to finish the month up an impressive 16%. 1982 showed gains of just under 12% in the first two weeks and finished the month with a shallow pullback of less than .75%. The finish in 1982 was impressive though as another 4.5% gain was tacked on to the October gains by the end of the year. Conversely, 1974 fell flat on its face going into the close of the year by turning in a measly -5.75% loss.

Obviously the situations of each year were different, although the market rhymes, and we are currently experiencing macro events never seen so it’s tough to solely rely on history for clues. I’m not here to dissuade the bulls from buying nor the bears from selling short. That’s not my game. I look for these rhymes, play the odds and manage risk accordingly. Below is one scenario that I’m considering as we enter the new week.

The chart below is a weekly candle chart that shows the 52 week simple moving average (blue) and the 260 week simple moving average (yellow). Notice how recently the 52 week crossed up through the 260 week and, more importantly, price closed above the 260 week moving average. Last time the SPX closed above the 260 week moving average was last November. The market had been on a rip higher blowing through resistance levels and confusing many. The first test was near the end of October which was followed by a shallow pullback over the next three weeks and then it was off to the races. One big difference is that the shorter-term 52 week average was underneath the longer-term 260 week average last year. Not the case today.

The thinking here is that perhaps we have a shallow pullback again like last November and then finish the year on a decent move higher. I’ll use this week’s price action, along with the stats I mentioned earlier, to manage my risk. If we close higher this week then I’ll lean more towards a similar scenario like that of ’74 where the end of the year isn’t so rosy. If a shallow pullback occurs this week then perhaps ’82 makes more sense, especially when combined with the price action of last November when we last encountered the 260 week moving average.