I’m a student of history, and I believe that using pattern recognition is a great way to get a gauge of what’s going on with markets. Of course, these days, much of the pattern recognition is left to computers that process millions of bytes a second. But I’m the son of an immigrant from the north side of Chicago. So I try to keep it simple.
When I look at today’s market condition, I can’t help but remember the last quarter of 1998. Back then, in the days before electronic trading, we used to put in our orders by phone. I’d have one receiver on each ear, two phones ringing on the desk and another one on my lap. And because everything came through us, I was able to pick up on certain things.
In this case, what I noticed an upside panic taking place. Portfolio managers were chasing return. They had found themselves in a situation where they were so shell-shocked by what was going on in the world that they didn’t know how to react in the marketplace. As they sat in cash and the market continued to grind higher, the realized they had to get in. That’s one of the reasons we saw big moves in the fourth quarter of 1998—I’m talking a 15-20%, and it happened just like that.
I think we’re in the beginning stages of something very similar today, here in Q4 of 2011. Even with yesterday’s selloff—which I maintain was a healthy correction—the market remains in an upside trajectory. And it’s moving very quickly. So quickly, in fact, that we could easily find ourselves up 15-20% off lows before the retail public takes notice.
Right now, the key is whether we can continue to take out highs. There’s a quirky thing happening right now that, because of the range we’ve traded in over the last few months, has the 100-day and 200-day moving averages within 20-30 points of each other. And we’re a actually finding ourselves using those two levels as support and resistance. So for confirmation of my bullish inclination, I’m watching for a close above the 1255-1260 level in the S&P. If that happens, I think we’ll see a run for return that will look like 1998 all over again.