2020 has been one crazy year. No-one could have predicted how things may have unfolded, with far more twists and turns than anyone could have imaged. While the virus remains on everyone's mind, we now find ourselves nearing the end of an epic year. In 10 years, certainly 20 and 50 years from now, we will say, "Wow, 2020 was indeed a crazy and wild year!"
Wall Street is rich in history. When the unprecedented pandemic appeared earlier in the year, this resulted in numerous records broken.
We suffered one of the steepest and quickest bear market declines in history. It took just 16 trading days for the Dow Jones Industrial Average to enter a bear market territory with a 20% decline. The benchmark S&P 500 Index and Nasdaq Composite Index also enter bear market territories one trading day behind. From peak to trough, the SPX Index lost 35.41% in only 33 calendar days from 2/19/20 to 3/23/20.
Volatility was one of the highest on record. VIX rallied to a high of 84.57 or just below the Jan 2008 peak of 89.53, established during the height of the Great Recession.
How wild is it that crude oil futures contracts briefly traded into negative territory on 4/20/20 at a price of -$40 per barrel?
From the depths of the steepest bear market drop in history, we also witnessed one the fastest recovery to new all-time highs. After bottoming on 3/23/20, in less than five months, the S&P 500 Index recorded fresh closing highs. As of today, the SPX Index has rallied 1,520.53 points from the bottom, and in the process, it has appreciated 69.37%. Nasdaq Composite and mega-cap Technology stocks have done even better, recording numerous record closing highs during 2020.
AAPL also became the first US-listed company to reach the $2 trillion market capitalization on 8/19/20 after announcing a 4-for-1 stock split. Today, there are four other Technology names with a $1 trillion-plus market-cap such as MSFT (1.592T), AMZN (1.557T), GOOG (1.20T), and GOOGL (1.195T).
The extreme volatility and the sharp move this year points to the U.S. stock market heading toward an inflection point. So, what is an inflection point? An inflection point refers to a turning point in the direction of the market trend. In the financial markets, there have only been a few inflection points. For instance, the 1929-1932 Great Bear market triggered the Great Depression. Within the technology realm, the convergence of wireless technology and the internet led to the Technology revolution that ignited the 1982-2000 structural bull. Most inflection points are not so obvious and dramatic. It can take many years to develop.
So, are there technical signs to warrant an impending inflection point will occur this year?
Outside days, as well as outside weeks, are common occurrences often showing up on daily and weekly charts. Outside months are less frequent but still appears on the monthly charts. Outside years are extremely rare, as these patterns occurred only a few times in the past century on major stock market indexes.
An outside pattern is either a bullish engulfing formation (i.e., positive outside day, week, month, and year) or a bearish engulfing pattern (i.e., negative outside day, week, month, and year). The closing price at the end of the period in question can signal a change in the current trend. A daily positive or negative outside day signals a near-term trend change. A positive or negative outside week confirms a bullish or bearish reversal pattern over the intermediate-term trend. A positive or negative outside month hints of a long-term directional trend change. A yearly positive outside or negative outside year can lead to a structural trend change.
A yearly chart and hence a yearly pattern often depend on the closing price at the end of the year. The rare technical formation does not occur for no reason. It is often the confluence of various structural forces that materially alter the existing dominant trend. Remember, structural trends, at least from the perspective of U.S. stocks, tend to sustain for eight to twenty years in duration. For many investors, this is the time when fortunes are made or lost.
As mentioned before, an outside year is a rare yearly reversal pattern. It can alert astute and experienced investors to a structural trend change. Since the 1900s, there have been seven outside year patterns in INDU. Three of which were negative outside years (i.e., 1937, 1966, and 1973), and four were positive outside years (i.e., 1949, 1980, 1982, and most recently during 2016).
The onsets of these outside year patterns have either led to the end of a structural trend and the start of a new structural trend or have reinforced the current and prevailing structural trends. For instance, a positive outside year during 1949 promptly ended the 1929-1949 structural bear trend leading to the start of the 1949-1965 structural bull trend. The 1980 and 1982 positive outside years occurred during the double-dip recession period leading to the capitulation phase to the 1965-1982 structural bear. On three other occurrences, the negative outside years during 1937 ended the 1932-1936 cyclical bull rally and led to the resumption of the 1929-1949 structural bear. The negative outside year during 1966 and again during 1973 prolonged the 1966-1982 structural bear.
The outcome of the outside year pattern in 2020 will likely determine the next structural trend for INDU. A confirmed positive outside bodes well for the continuation of the May 2013-present structural bull. However, a negative outside year warns of the next structural bear. If INDU closes the year near the midpoint of its yearly range at 24,267, then this implies the continuation of a choppy, volatile trading range environment for the next few years.
A brief scan of the global stock market, sectors, and other asset classes suggests this year will be another historic year. With less than 3-weeks before the end of the year, there are signs of numerous positive outside years. We could not recall ever witnessing so many long-term bullish reversal patterns occurring at the same time in recent decades. If confirmed by the end of the year, this is either the start of the next structural bull trend, or this is one of the largest speculative bubbles of our lifetime.
US stock market indexes with positive outside years are S&P 500 Index (SPX), Dow Jones Industrial Average (INDU), Dow Jones Transportation Average (TRAN), Dow Jones Utility Average (UTIL), S&P 600 Small Cap Index (SML), Russell 2000 ETF (IWM), S&P 400 Mid Cap Index (MID), and Micro-Cap ETF (IWC).
International stock market indexes with positive outside years are MSCI EAFE Index ETF (EFA), MSCI Emerging Markets Index ETF (EEM), China Large-Cap ETF (FXI), MSCI Eurozone ETF (EZU), Tokyo Nikkei Average (NIKK), MSCI Japan ETF (EWJ), MSCI Germany ETF (EWG), and MSCI France (EWQ).
S&P 500 sectors with positive outside years are S&P Healthcare ETF (XLV), Communication Services (XLC), Industrials (XLI), Consumer Discretionary (XLY), Consumer Staples (XLP), Utilities (XLU), and Materials (XLB). Outside year patterns – Financials (XLF) and Real Estate (XLRE). Both are trading slightly below their respective intra-year highs. A yearly close near the top of the range confirms a positive outside year.
Commodities, Currencies, and Fixed Income assets with positive outside years are Copper futures, Silver futures, DB Base Metals (DBB), EURUSD, CADUSD, AUDUSD, High Yield Corporate Bond ETF (HYG), High Yield Bond (JNK), National Muni Bond ETF (MUB), Investment Grade Corporate Bond ETF (LQD), TIPS Bond ETF (TIP), and Emerging Bond ETF (EMB).
Enclosed below are two examples of the potential positive outside year patterns.