S&P's greatest storm
Aside from soaring stock prices, James highlights several fundamental similarities between now and then. In 1987, the S&P was trading on a forward price-to-earnings multiple of 13.3, the US economy was four years into an expansion, inflation was below 2 per cent, and bond yields were rising. The same all apply today.
Back in early November, there was also talk of the threat of a financial hurricane. Elliott Wave International, the market forecasting company, said the prevailing optimism was reminiscent of early 1973, just before the US market collapsed by 45 per cent over 11 months.
In response, I decided to take on the role of Michael Fish, the former BBC weatherman who infamously reassured the nation on the eve of the mighty storm of October 1987 that there would be no such tempest. I said that the S&P - which was then trading around 1427 – would head to above 1500 and that I saw no sign of a crash coming - http://bit.ly/PJcAC0. Unlike Michael, I have so far been proved right.
I have no problem once again donning Michael's monstrous check blazer and thick-rimmed specs and saying that I am not worried about an imminent mega-storm. But I would concede there are at least superficial similarities in the price action of the mid-1980s and that which we have seen since March 2009.
The 1980s boom
At the end of February 1987, the S&P had risen by 181 per cent over the preceding 54 months. Today, it is up by 133 per cent over 48 months. In both years, the month of January was a cracker: up 16 per cent in 1987 and 5.8 per cent in 2013. Back then, the monthly relative strength index (RSI) was at 73 per cent, while it currently stands at 69 per cent.
The boom since 2009
Digging a little deeper, I notice that the S&P had suffered just two pull-backs of more than 10 per cent between the start of the bull run in 1982 and the top of the market in 1987. By contrast, we've had three rather larger pull-backs since March 2009. As a result, stocks had already spent extended periods at extremely overbought levels by the time the index peaked in August 1987.
The 1987 blow-off top
In one regard, I certainly would agree with James, however. If the markets simply continue to charge upwards over the months ahead, the eventual pull-back will be much nastier. Having already got off to flyer in 1987, the S&P romped ahead by 17.5 per cent between February and August. At its peak, the monthly RSI reading had reached an eye-watering 80 per cent.
I wouldn't rule out the market becoming ridiculously stretched over the months ahead. The conditions are certainly ripe for it, what with an improving US economy, the containment of the European crisis and, most importantly, all that liquidity from the central banks still gushing into the markets. And especially if the markets did rampage higher, I think that the withdrawal of monetary stimulus could then send them into a tailspin.
For spread-betting purposes, I shall continue taking long positions for now, until the near-term trend reverses decisively. Assuming a 5 to 10 per cent shakeout follows, I expect to buy aggressively into a subsequent recovery.
