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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