The Blueprint for the COVID-19 Crash
In 1987, a documentary called Trader was broadcast on PBS.
The film featured a then little-known trader named Paul Tudor Jones. Today, Jones is a billionaire. His firm manages billions more in strategies that touch every major asset class.
The video features Jones predicting the 1987 market crash by identifying important areas where the market lined up with previous time periods. You’ve probably heard the old quote from Mark Twain that history rhymes — well, markets do too.
Good luck finding a copy of Trader today, though. Jones reportedly bought up every existing copy of the film he could find, and very few copies are still out in the public.
But having seen it, I can tell you that his approach then was a lot like what I’m about to show you now…
You see, two prior years could lay out the blueprint for what to expect as uncertainty surges during the coronavirus crash.
Back in 1987, Jones saw an uncanny similarity when he compared the market’s price action that year that year with the price action leading up to the high that led to the 1929 crash.
This year, as COVID-19 plagues the stock market, we’re seeing another incredibly similar pattern.
In fact, going back to 1928, those three years — 1929, 1987 and 2020 — have been the only three in history where a bear market has followed directly from all-time highs in the S&P 500 and its predecessors.
Last week, I shared a chart showing the similarities. Here’s the updated version this week:
The chart above looks at 2020 (in black) and compares it with every single 30% drawdown from all-time highs over the last nine decades or so. It’s hard to miss the similar trajectories between this year and those two prior crashes.
The good news, as I said last week, is the fact that we’re currently in the range where those sell-offs have given way to at least some semblance of a bounce. That’s why stocks have rebounded in the past couple of sessions.
That typically happens when the market’s around 30% off from its highs.
A lot of that has to do with human nature.
While we like to think that we’re smarter than older generations, human psychology isn’t any different than it was 30 or 90 years ago. When the market rolls over hard, our lizard brains turn on.
That’s precisely why 1929 and 1987 look so similar. And why 2020 is following suit.
From here, a retest of the lows put in last week looks likely. That’s what happened in each of our prior analogs.
The good news is that barring any colossal surprises from the news cycle, we should see volatility cool off over the next 100 trading sessions or so as investors snap out of panic mode and weigh the likely outcomes from the pandemic.
It’s worth noting that beyond that 125-day mark, 1987 and 1929 had vastly different outcomes. Stocks continued rising in 1987 while they met another crash leg in 1929.
Stay tuned — I’ll be sharing more research on which of those outcomes looks more likely from here…
Jonas Elmerraji, CMT