Every 30 years or so, markets make what can be described as a generational low. We can define this as a capitulatory bottom, one that might be caused by a variety of factors, but usually includes some combination of fear and panic.
This equity-market low point is likely to be unchallenged during the next 10 to 20 years. After that, the combination of population growth, technological gains and inflation means that we are unlikely to see stock indexes at those prices again.
Toward that end, have a look at the following chart, courtesy of the technical team at Bank of America Merrill Lynch. “History may not repeat, but it rhymes,” goes a quote which is often credited to Mark Twain.
The chart has something for bulls and bears alike: The “rhyme” here, as analyst Stephen Suttmeier suggests, is a double-edged, good news-bad news affair.
Let’s start with the bad news. Compared with other market rallies off of deeply oversold conditions, the present rally is ahead of itself and in need of further correction. Markets cannot (or at least should not) rally 160 percent (or 32 percent in any given year) without some excesses that need to be addressed. In other words, this moonshot has simply gone too far, too fast and needs to take a pause, a chance to digest its gains.
The good news is that at this stage in a move off of a generational low, there are bigger gains to be had in the future. Yes, this market has come along way, but if (and that is a big if) this is a new secular bull market, it has years to run.
This is fairly consistent with my perspective. The bull market has been overdue for a correction, one that appears to have begun last month. The deeply oversold condition is likely to lead to a bounce before selling resumes. However, market internals (especially breadth) suggest this retreat is merely a correction, and not the end of the bull market.
All the usual caveats apply. Your mileage -- and portfolio returns -- may vary.
(Barry Ritholtz writes about finance, the economy and the business world for Bloomberg View. Follow him on Twitter@Ritholtz.)
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