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“Reality leaves a lot to the imagination.” – John Lennon
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Futures are flat with a negative bias this morning as the relentless rally in gold takes a pause, and oil prices see a marginal pullback. Stocks in Asia were higher overnight as China reopened for trading, and shares of Softbank surged more than 10% after announcing a deal to acquire the robotics units of ABB for $5.4 billion. In Europe, trading has been listless with the STOXX 600 down 0.04%.
The S&P 500 closed at another all-time high yesterday, just like it did 18 years ago today on 10/9/07. That new high in 2007 followed a late-summer peak-to-trough correction of nearly 12%. It was a time of stress in the financial system as the subprime housing market was in the process of imploding, but the Fed was cutting rates, and the damage ‘appeared’ contained. From a technical perspective, the S&P 500 had traded above resistance to new highs, and the 50-DMA, which has been sloping downwards, turned higher just above its 200-DMA, which was also rising. The one caveat was that the breakout to new highs wasn’t especially convincing, as the S&P 500 had only made a marginal new high.
Investors breathed a sigh of relief on 10/9/07, but in the days that followed, the S&P 500 couldn’t follow through on its breakout, and within days, it was back below its summer 2007 highs. Shortly after that, the wheels came off, and the crash began. A year after the October 2007 high, the S&P 500 cratered more than 40%. As loud as the sighs of relief were in October 2007, they had nothing on VIX screamings towards 80 a year later as the entire banking system was on the verge of collapse.
The experience of October 2007 should serve as a reminder that even in the best times, investors should always be prepared for the possibility that the light at the end of the tunnel is a freight train steaming right at us. It’s only fitting this morning that on the anniversary of the 2007 peak, JP Morgan (JPM) CEO Jamie Dimon is in the news, warning of a correction in the market at some point in the next six months to two years. At first glance, that statement seems like something you would hear coming from Captain Obvious. Of course, there will be a correction in the next six months to two years! Stock market corrections occur on average about once a year, so there may actually be two!
If you read more into Dimon’s comments, though, he’s talking more about a serious bear market than a 10% correction. Even still, six months to two years isn’t really a precise forecast. While Dimon’s comments may not be of much use to investors or traders looking for any direction on where the stock market is going, they are exactly the kind of comments you want to hear from the CEO of America’s largest bank. That’s why JP Morgan Chase is just about the only major bank where the name on the CEO’s door is the same now as it was then. Dimon has earned the right to worry!
As bad as the declines were following the October 2007 high, as we always say when it comes to the market, time heals. It took several years, but eventually the market went on to make new highs, and this morning, the S&P 500 will open more than four times higher than it was when it closed at that peak 18 years ago.
