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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