MIKE OLIVER: Hi. I'm Mike Oliver with Momentum Structural Analysis. Before I get into the major stock market situation that we're going to look at today, I need to explain a few things about MSA. Our methodology at MSA is not orthodox technical analysis. We treat prices as a secondary factor, not our primary point of focus.
There are major reasons for that view of technical analysis and why we're suspicious of the veneer of price action. But rather than go into depth on that issue now and bore you, we suggest you go to our website olivermsa.com.
Anyway, now to the major stock market situation, and it is not far below our feet. I'm going to take a little leisurely tour through the market archives. We're going to begin with 1929 and look at both the price chart, which is at the top of your screen, and the momentum chart below. The price chart is a monthly bar chart of the Dow industrials from 1926 through 1929.
And overlaid on the price chart is a moving average, a 3/4 moving average, which we adjust every quarter. It averages the three prior months of the prior quarter. And it's sort of like a 200-day average in terms of its duration, but we prefer it to the 200-day average.
Anyway, that's what's overlaid on the price chart, and that's basically, what everybody saw back then. If they were looking at charts, the only thing they saw was this chart here, the price action of the Dow. And no doubt, it kept them very comfortable all during that several year period because as it rose, it did it nice, steady manner. You'd have 10% pullbacks frequently, but they never lasted very long.
One problem with the price chart in terms of guiding yourself in that market is that there were no good trend lines you could draw. You could find two lows that might intersect, but then the next low would be a higher low. There was an ascending pattern of the upward trend. So you never could find a multi-point uptrend structure to draw through the price chart. It was like an arc, but it was a comfortable arc, no doubt.
Then in the first half of 1929, January through the summer, went into a distribution zone or a congestion zone, but clearly there were people saying above the 320 price level, for example, I want out, and they were distributing routinely. Several times you probed up above 320, you'd fall back to 280, go back up to 320. They'd whack it again. And ultimately, they lost. Actually, they didn't lose, they were just premature.
We broke out in June of 1929 above that trading range you see on the price chart. And you accelerated rapidly to an August high. It really looked quite good. It looked like a whole new leg was beginning in the market. But in September, the market turned back down erasing the August gains, but it was still above the top end of that prior distribution zone at 320.
And so if you looked at the price chart and you were, of course, back then even price chart technical analysis was in its infancy, but you would look at the 320 level and say, gee, there's support down here at 320 because that was the set of highs all during the first half of the year. So you felt comfy. The pullback wasn't a threat, it was a buying opportunity.
Let's now shift down to the momentum chart below, and let me explain how these were plotted. First off, the zero line you see on this momentum chart is the 3/4 moving average, and each of the bars is the monthly price action of the Dow in relation to that zero line, the 3/4 average. In other words, if the month was above the zero line, then the momentum chart would show the bar above the zero line, above the 3/4 average.
And when you plot this momentum chart, you can see that between 1926, when it merged above the zero line in June of '26 from a low, it had been below. It's on the left side of both charts. And after that June upside breakout over the zero line, the market lived above the zero line for over three years. It was a very comfy place to pull back to. It's what you call return to the mean. It returned to the mean three different times during 1926 through 1928.
Then when the market went into its congestion zone in early '29, momentum was up at a very strong level at 35 or so percent above the mean. And again, if you'll look at the momentum chart and compare it to the price chart, from that point back, all the way to 1926, the momentum chart was in full agreement with the price chart, meaning that when the price surged up to a new high, momentum surged to a new high and applauded it.
But then when that breakout occurred in the summer of 1929, momentum was nowhere near breaking out. In fact, it was already in a down mode. And you surged only halfway back up to the momentum high reading that you'd seen in late '28, early '29. So momentum was choking when price was exploding late in the summer of 1929. Momentum was not in agreement at that point. It was what we call non-confirming.
Then in early October, the momentum chart dropped back down to the zero line. Don't feel lucky because when you go back to a structure that is this clear that a blind man could almost see it, that you've hit three times before and you're now hitting it a fourth time, but this time you're hitting it from a non-confirmed high, don't assume it's going to hold, and it did not.
But at the same time momentum was breaking through that zero line, price was now approaching that support level at 320. So price was saying, I'm at support, momentum was saying, no, you're dead. And within days, the crash was over. So you didn't have a lot of time to have committee meetings or to think about the issue.
But this is an example of what we mean by momentum structure, what we would call momentum structural analysis. We look for structures on the momentum chart that you might not otherwise see when you look at the price chart. And indeed, here we had such a, situation a very wide structure, very well defined, and it was no surprise when it broke that you dropped drastically.
Let's go through the next set of charts, which is 1987. Same situation here. We have a price chart at the top with a 3/4 moving average, and below is the momentum chart showing momentum readings, the price in relation to the 3/4 average, which is at the zero line. In the summer of 1984, the market was making low, and it emerged back above the zero line, the 3/4 average, in August of 1984, and it lived above that line for the next three and a half years.
It had three pullbacks to the zero line once it got above it in the summer of 1984 with three distinct pullbacks that held at around the zero line. Then came the final sharp upward push in price in the summer of 1987. Price was quite robust, but momentum was not so robust at that July and August highs. They were making new price chart highs, momentum was not making new highs.
In early October, you dropped down, you broke through the prior six months momentum action, not the zero line yet, through the prior six months of action, a break worth noting. You were dropping from a non-confirmed high, which is often a hint that something is wrong, and you hit the zero line. The point at which you hit the zero line for the fourth time was well above any price level that the price chart could define as a breakage point.
And so again, the price guys were seeing a pullback that looked like a buying opportunity. Momentum says, no. It was over within days. In fact, the drop was a swing measured move, basically, of you went from a peak in early 1987 on the oscillator, 25% over the mean, and the low in the crash was a little more than 25% under the mean. So if you were looking at the momentum chart as if it were a price chart and you swung the difference between the highs on the oscillator and the zero line and subtracted it, lo and behold the crash met the swing measurement. It didn't take months, it took days.
Now, we go to the current market, which the charts include here the 2003 through 2008 period as well. And you can see, again, looking at that period 2006, '07, and '08 on the left side of both charts, the momentum chart built a structure. This time it was not at the zero line. It was about 5% or 6% over the zero line, but it repeatedly hit it three different times between 2004 and 2007. And in January of 2008, it closed below that structure.
Well, in January 2008, the price was $13.78, and the market muddled around for about four or five months, dropped came back up, dropped again. This was a slow start bear market. The structure was not that wide. It was three and a half years wide, but the structure wasn't at the zero line. So it made it a little safer when you broke it.
So the downside was slower to engage, and you finally had your crash effect in late 2008, October 2008. It didn't come at the beginning. But you can see here another example of a momentum structure that you cannot see on the price chart. The price chart had an upward arcing action. You had some pivotal lows that were taken out, but momentum had pivotal lows going back over three years that were taken out. So momentum, again, advertised ahead of time, you have a big structure below you. And sure enough, the consequences were quite deep.
Now, the current market. We come up from the 2009 lows and the market bumps the zero line from below in early 2010 and pulls back sharply from the zero line back from the zero line to about 10%, 12% under. Then later in mid 2010, the market asserted itself back above the zero line for the first time in a couple of years. And it lived above the zero line from late 2010 until the present.
This is the biggest momentum structure we have ever seen in the history of the US stock market. And this isn't measured on a 3/4 average. This is measured on a 36-month average, meaning, this is effectively a three-year moving average of the market. So it's even longer term duration average, and the structure is massively wide. So the market has lived for 10 years comfortably above the mean.
It hit the mean in 2011, summer, fall of 2011 during the European debt crisis. It hit it again in early 2016. It hit it again in December of last year never closing below it on a monthly basis. You can see that the price action is very cheery. We made it yet, again, a new high, but if you look at the momentum chart, the action is a pattern of descending highs, non-confirming with the infrastructure spending below, a three times hit structure.
Now, there's another version of this chart that we're focused on, and that's the monthly close only price chart of the S&P, which shows simply the monthly closes in relation to the 36-month average. And the momentum chart below is the monthly closes plotted in relation to the 36-month average, which is the zero line. And if you'll notice the pullback in 2011, 2016, and 2018 didn't hit the zero line on the monthly closes. In fact, those three lows or so close to each other in terms of percent above the 36-month average that they're a very tight fit. There were either side of 3% above the 36-month average at each of those lows on a closing basis.
Therefore, if you close any month in the future at 2% over the rising 36-month average, this massive structure gives. In fact, it's our view at MSA that if you even touch 2% over again, you don't want to wait around and have a committee meeting. It's likely it's going to give way right away because of the ripeness and massiveness of the structure and because of the non-confirmations that are recurring in the last two surges, the September 2018 surge and the one we're in right now.
Where is that 2% over structure? Well, it rises every month about 1% because the 36-month average is rising monthly, but looking out to next month, if the S&P were to drop to 2,631, it seems like a long way away, but do the percentages, it's not that big of a deal, you're at 2% over. If you look at the price chart, 2,631 doesn't mean much. It doesn't say I'm breaking down, it says I'm selling off again. But the momentum chart is blowing the biggest structure in stock market history.
There are some major firms over the last week have uttered negative statements about the stock market. Morgan Stanley is one, Blackstone Group, Wells Fargo, and I'm sure there are others, and no doubt, there are reasons for being negative on the market or at least for a large correction, is based on fundamental arguments, fundamental data points. But we can say with confidence that you better not get a correction. If you get a correction of the 8%, 10%, 12% variety, which everybody would feel comfortable is a buying opportunity, you're not going to stop there.
And it's likely that the whole argument we've seen for the last year or two between the bulls and the bears will be resolved