Another Historic Double Top: 2007 (Preview)

By Lawrence G. McMillan

Last week, we wrote extensively about the similarities between the current market and the market of the summer of 2000.  In 2000, $SPX rallied back to its old highs, forming a double top right around Labor Day.  From there, the market declined 50% into the summer of 2002.  

This week, a friend sent me an article from Barron’s (online) regarding double tops in 2000 and 2007.  I hadn’t necessarily thought of the top in 2007 as being a double top, but upon closer examination, it was.  The chart on the right shows the action of $SPX in 2007.   A strong bull market was in progress, off the 2000 lows at $SPX 770.  The first sign of trouble was in February 2007, when China raised margin rates, resulting in a 50-point one-day decline in $SPX. $SPX recovered from there to make new highs in July.  Then, for the first time we heard the words “subprime debt,” and the market took a tumble.  Fed Chairman Bernanke stepped in with a “rescue rate cut,” and $SPX merrily traded up to new all-time highs (by a small amount) in October.  That’s when the wheels began to come off, and a bear market started, although it was slow and methodical at first – disguising the devastation that was to come.  By the time the 2007-2009 bear market was over, $SPX had lost 58%. 

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