The Market in 2007 vs. Today

Mar 19, 2014   //   by Profitly   //   Profitly  //  Comments Off on The Market in 2007 vs. Today



All of the gurus on Profitly are a bit different, but they all use technical analysis at some point or another. Fundamentals have never been able to predict an exact market top, but technicals can occasionally offer clues toward trend changes in buyer/seller behavior at key turning points.

If you look back at 2007, many of the traders that focused on technicals were the ones that were bearish. On the other hand, those that are focused on fundamentals were more bullish and believed that the problems in the sub-prime market were contained.

Tim has said in the past that you need to be able to look at both the technical and fundamental standpoints to decide which trades to enter, so don’t think this post is bashing the fundamental side of things. It is just meant to show you that in different situations, different techniques are more useful.

Last week there was a lot of selling going on in the market, with the Dow Jones Industrial average ending lower every single day. In fact, according to research from Bespoke Investment Group, over the last 10 years the Dow has been down all 5 days of a 5-day trading week 7 times, so a pullback is healthy here. Bespoke also points out that as of last Thursday, 66% of S&P 500 stocks still above their 50-days. Combine that with the market being up 181% off the 2009 lows, and people are constantly look for reasons to think this is another top.

Josh Brown of The Reformed Broker pointed out that Jon Krinsky, technical analyst at MKM Partners, has a recent piece highlights the major technical difference between the stock market today and in 2007 by digging beneath the surface of price and taking a look at the internal dynamics.

The lack of a cyclical top stems from several key reasons:

  1. Breadth
  2. Trend
  3. Leadership/rotation

Breadth: In our view, cumulative advance-decline lines are one of the better long-term breadth measures to observe. As you can see below, at the 2007 peak, even as stock prices (NYSE Index) were making new highs in October, the cumulative advance-decline lines had already peaked four months prior, and were clearly in a downtrend.

Below, Krinsky’s chart demonstrates the negative divergence in advance-decline that signaled the 2007 top – yes, markets were making new high, but there were less stocks participating and the rally had become more and more concentrated. This is a classic tell that a bull run is exhausted.



Now here’s the same chart today. Take note of the confirmation emanating from fresh breakouts in the advance-decline…


Krinsky tackles the second two points, Trend and Leadership, in the report, saying that while we’re definitely overextended (326 days above the 200-day moving average in the S&P 500), the technicals still do not remotely suggest that we’ve reached a 2007-like top. If anything, strength in these measures augurs well for continued strength, even if a retest of the breakout level is coming soon.

Then the Wall Street Journal pointed out last week that Bespoke also said nine of the 10 biggest S&P 500 companies are currently trade at price-to-earnings ratios of less than 20. Compare that number to the peak of the tech bubble in March 2000, when not a single one of the 10 largest companies were that cheap.

In 1999 and 2000 when the market rocketed to new territory, the bubble started in tech stocks and then made its way through the rest of the market. That bubble lifted tech companies to excessive valuations and pushed the market to expensive levels. Today, however, valuations of the biggest companies remain in-line or even below historic averages.

Take the top 10 companies, on average. They currently trade at 16.1 times trailing earnings, according to Bespoke. In March 2000, the 10 biggest firms had an average P/E multiple of 62.6. Yes, 62.6, that’s nearly four times the current amount.

For some added perception, Google’s current valuation would’ve ranked as the third cheapest among the S&P 500’s top 10 biggest companies in March 2000.

Microsoft, which was the biggest company in the tech boom, traded at 56.8 time trailing earnings. So before you start talking about bubbles and market tops, take a look at technical analysis as well. As a trader or investor, it is important to see all perspectives of the story in order to make the best judgment call. The market may have more pullingback to go, but that doesn’t mean we are headed lower for the rest of the year. Maybe we are, but technical analysis isn’t showing that is the right call as of now.