What Can 1962 Tell Us About Today's Stock Market?

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We dove into market history a lot recently with studies of the 3%+ up day a couple weeks ago as well as a look at the growth rate of the index of Leading Economic Indicators. The takeaway: History suggests there are grounds for being optimistic about the stock market.

Now here's a new reason for optimism: The current situation bears a striking resemblance to the 1962 summer stock market rebound. 

Here's the scoop: In early 1962, a head-and-shoulders pattern emerged that looked very similar to the one that appeared to have taken shape in April-June this year. When the neckline of the pattern was violated in April 1962, stocks fell like a ton of bricks into a June low that was ultimately 27% lower than the January 1962 high. 

At that low, stocks were naturally well below their 50 and 200-day moving averages. Yet the index of Leading Economic Indicators at the time was positive, showing no potential for a second slump in gross domestic product (GDP) growth following the nasty 1960-1961 recession.

Then in the first week of July, the market caught a bid out of the blue – rising 3% in a single day. And that ignited a rebound in optimism that carried that market up 32% over the next 12 months, much to the surprise of most market observers at the time.

BP Is On The Block
The veteran analysts at Lowry Research have studied that period intently to determine whether it may hold clues for the present. Their main aim was to determine why that head-and-shoulders pattern keeled over into a 27% decline, while the recent pattern appeared to have been reversed rather suddenly last week before stalling on Friday.

Their answer: The difference is breadth. Buying grew increasingly selective heading into 1962. The NYSE Advance-Decline line topped out in May 1961 and was well below its highs when stocks hit their high in December 1961. So the market was vulnerable when prices broke down from the head-and-shoulders pattern in April 1961. Moreover, during that period Lowry's proprietary measures of the supply and demand for stocks deteriorated rapidly.

Nothing of that sort happened over the last few months. The NYSE Advance-Decline line hit a new high along with prices in April 2010 and remained well above its February low even while the major stock indexes fell sharply. Also, over the past few months Lowry's measure of supply has fallen while its measure of demand has climbed since late May.

In short, the review of the market's condition in 1962 provides some evidence that the slump in the past three months was not the start of a major new decline but rather a pause in a powerful uptrend. However it's too early to make a firm conclusion that a new advance has begun in earnest yet.

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  1. Jeff Pluim | July 22, 2010

    I don't know how you can write this stuff Jon. You are obviously too young to know what the economic conditions were in 1962. But if you don't know what you are talking about, leave it to the real pro's to do the forcasting. But Jon, you do know that "Fast Trading" by the big boys, was not around in 1962, and that should give you an indication that the markets are not the same as they were back then. You should already know that if you took out the Fast Traders, the market volume would be so low that it would bare no resemblence to the 1962 market.
    So Jon, stop relying on your goofy charts and start looking at the BIG PICTURE. I know you can do it because I have read a couple of your articles that showed your ability to do that, and do it well, unless you had someone else write those columns for you.
    Your little disclaimer, the last sentence in you article, does little to build confidence in your forcasting.

  2. James | July 23, 2010

    Good observation, Jon. I graduated college in May, 1962 and joined the US Army Reserve to fulfill my military obligations. In September, I started basic training and the cadres became nervous when the Cuban crisis unfolded in late September to early October. The dip on l0/01/62 reflects the impact of the Cuban crisis on the stock market. After it was resolved the stock market trended upward, after taking another dip after President Kennedy's assasination in November l963, and the Great Society programs initiated by LBJ after he was elected by a landslide as President in 1964 took off.

    How do I know the stock market rose? I ended up in a government job in Washington, DC and my colleagues were making money in the market hand over foot. Every day conversation was about the stock market. One of my colleagues invited me to a free stock market investment workshop, even if I didn't have money to invest. That sparked my interest in stocks as an observer.

    Anyway, one of my colleagues invested in auto stocks and saw them take off before selling in 1966. My other colleague did well too and sold his stocks before taking off to serve in the foreign service in Africa.

    My previous boss who was a medical doctor when President Kennedy was assasinated was also deep into stocks. When I wanted to make conversation, I would just ask him, "How is the stock market?" and his face would light up. His mood reflected the day's market. When the market was good, he was cheerful. When the market was down, he was not too cheerful.

    Those years were heady times. I don't think it is like this now, but better days are ahead in the foreseeable future. Corporations are loaded with cash, employment opportunities are improving, consumers are reducing debts, inflation is nowhere in sight, the BP oil spill is more or less contained, mid-term elections are raising optimism among voters, and President Obama's reforms to health care and financial regulations have been approved, put into place and awaiting implementation.

    What is holding back the economy? It is too tight credit. Banks should loosen up and provide easier credit. For instance, I talked to a home builder and he said home buyers are required now to put a 25 percent cash deposit before they can purchase homes. Who has that kind money in hard times like this? By loosening this requirement, more people should be able to pruchase homes and this should trigger new housing and stimulate home resales. I think economic recovery begins with new home construction and real estate.

    The high federal deficit and war in Afghanistan and Iraq are also weighing down our economy like what the Viet Nam War did to the US in the late sixties and going into the seventies. The US economy was a drag in the seventies. It is a question of guns or butter. I am wondering. Is it going to be like this for the US, not this year, but the years ahead?

    I piddled in the stock market in the seventies and did not make money because the stock market was a horrible place to invest. Is it deja vue for the next several years?

  3. Rich | July 26, 2010

    While I know that the urge to compare "this time around" to other periods is keen it just cannot be done. In 1962 while we tussled with the Soviets and were wary of the Red Chinese we were still reaping the effects of being the only manufacturer left on the planet…..a superpower….having little debt…..in a major infrastructure buildout cycle…..and the free world looked to us to keep it safe.

    NONE of these are true in our current weakened state….

  4. Pal | July 26, 2010

    I might short something, and I might just quit take my toys home and go on vacation.

    But there is no way Hell I would go long on equities in this market.

  5. Jeffrey | July 26, 2010

    Saw your link from a newsletter and thought you might say something else.

    Not 1962, But 1962-1982
    Yes, it's looking like 1962 – 1982. If you look at stock prices from the fall of 1997-2017. You will see what I mean.

    We are bouncing between a SPY base support around 73 (x) and resistance around 157 (2x).

    Even the Feds are not looking to regain a 5% unemployment rate for another 5 to 6 years.

    I wouldn't expect too much different until around 2017. Until then enjoy the choppy waters.

    • Jeffrey | July 29, 2010

      James Bullard, president of the Federal Reserve Bank of St. Louis, makes the case in comments to reporters and in a paper released Thursday. The weak economy poses the risk that the United States could tip into a Japanese-like bout of deflation, he says. That's a widespread and prolonged drop in prices of goods, values of homes and stocks, and in wages.

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