Last week, Citi technical analysts put two charts next two other and emerged with an overlay that gave them “the chills.”
The chart showed the S&P 500 this year meshed with the index in 1987, leading up to the “Black Monday” crash that year. On October 19, 1987 – 29 years to this day – the Dow plunged 508 points, or 22.6%.
Tom Fitzpatrick and his team said the visual similarity and a number of risks like the US presidential elections had them worried about the market.
However, that is blindly comparing price action from one year to the next, according to Ryan Detrick, senior market strategist at LPL Financial.
“We thought about it in-house and the word we landed on is ‘uninformed,'” he told Business Insider.
Besides, there are a few key differences between now and 1987.
The S&P 500 is less than 3% from all-time highs. Detrick noted that it rarely suffers a huge fall when it’s that close to a new record. By his calculations, the index has only dropped by more than 3% eight times when it was less than 3% from a new high.
Also, the market hasn’t had the kind of extremely sharp rise in 2016 that it did in the first two-thirds of 1987, suggesting that stocks haven’t hit an unsustainable high.
“Going back to ’87, there are still arguments over exactly what ’caused’ the crash,” Detrick wrote. “The bottom line is ’87 saw a near vertical start to the year and was up close to 40% for the year at the start of September.”
“In other words, stocks were extremely stretched – making a large pullback much more likely.”
The S&P 500 has gained just 5% this year.
But there are concerns about the stock market’s current valuation, judging by metrics like the price-to-earnings ratio. In fact, the median P/E ratio of S&P 500 stocks, which is well above its historical norm, had Bank of America Merrill Lynch strategists drawing comparisons to the tech bubble.
According to Detrick, the low level of interest rates and inflation somewhat justifies why valuations are high.
Fitzpatrick cited the upcoming US election as a risk to the market. Detrick said that while political risks are very real, the stock market rarely sees a huge pullback in the October before voting takes place.
And if we’re to go back to the chart that started it all, Detrick published this one below, which shows the S&P 500 not by the index’s level, but on a percentage basis by year-to-date returns. There’s hardly a striking similarity here.
- LPL Financial