Ari Wald, Technical Analyst at Oppenheimer, compares today’s equity markets with the markets prior to the Black Monday crash of thirty years ago and finds no reason to believe we are near a similar major top.
Wald says that one key difference between 1987 and 2017 is the disparity in S&P 500 returns. In 1987, the S&P was up 33% year-to-date into October, whereas this year the S&P was up ‘only’ 12.5% year-to-date into October.
Secondly, Wald stresses the difference in internal breadth between 1987 and 2017. In 1987, the NYSE Advance-Decline line peaked in March and did not make a new high with the S&P 500 in August – indicating that fewer stocks were participating in the rally (see Chart 1). Narrowing breadth, says Wald, is a common characteristic of a market top.
In contrast, currently the NYSE Advance-Decline line has confirmed the S&P 500’s latest price high with a high of its own (see Chart 2). Wald thinks that this signal of broad-based participation argues against a major top.
Finally, in Barron’s latest semi-annual “Big Money Poll”, 61% of surveyed managers responded that they were bullish or very bullish on stocks through to the middle of 2018, the most bullish reading since October 2013. Wald says that instead of being a contrarian indicator, he has found that high bullishness in this poll has actually been followed by above-average returns in the following six months (see Chart 3).
As such, Wald is still bullish on US equities and he thinks that pullbacks should be seen as good opportunities to buy.