I see this market like the market in 1989. In October of 1989, the United Airlines junk bond deal for the employee led buyout of the company fell through. This caused a similar crisis of confidence and an end of the “buyout” boom of the late 1980s. The following chart shows what the market looked like in 1989. Like, today, the market had experienced a sharp rally coming off of the 1987 lows.
This is what the market looks like today…
This is what the 1989 market turned into – a giant ugly trading range that culminated in the decline going into the first Iraqi war. To make money, you had to sell moves to the old highs and buy dips below the 200 day moving average.
I think one of the keys to determining whether we’re in a similar environment is the transportation average. In 1989, the transports took a nasty fall after a strong run higher. They never recovered and never even made a stab at the old highs. That indicated underlying weakness in the economy and the markets.
If the transports don’t recover, I think a similar 1989 – 1990 scenario is likely.
The other problem is that we are not at a 40 week cycle low. The 40 week cycle has worked fairly well since the 2004 bottom. The cycle isn’t due to bottom until November. Therefore, we’re probably in for another test of the lows at some point in the next several months.
And all this leads investors to seek the safety of large caps.
