Market Analysis
1990 Market Correction
The 1990 market correction occurred during the 1988-1999 bull market with the market losing 21% over a 3-month period.
Long pullbacks lasting more than six months or pullbacks that lose 20% or more are considered to be market corrections for the purposes of this analysis. The 1990 market correction losing 21% meets the criteria for a market correction.
Charts from stockcharts.com are used to analyze all of the market cycles that have occurred over the last ninety years. Analyzing the market cycles with charts gives stock investors a visual representation of how the stock market moves over time.
The S&P 500 index is the industry benchmark and is used to analyze the 1990 market correction and all market cycles from 1957.
The S&P 500 index was introduced to the stock market in 1957 and the index included back tested data to 1925 based on the historical prices of the stocks that made up the index. This provided historical data for comparison with the Dow Industrial Average.
90 Year Market Chart
The following quarterly 90-year bar chart shows the 1990 market correction which occurred during the 1988-1999 bull market.
Chart 90yr: 1990 Market Correction
Chart by stockcharts.com
As can be readily observed from the long-term 90-year market chart, the 1990 market correction is just one of many corrections and bear markets that have occurred over the last one ninety years.
The 90-year market chart also shows an 80-quarters (20-year) simple moving average which has spent most of the last ninety years trending upwards. This shows that over the long-term the market has broadly continued higher as the moving average followed the S&P 500 index higher.
20-year Market Chart
The following chart shows the 1990 bear market on a 20-year chart with the S&P 500 index plotted as a monthly bar chart.
Chart 20yr: 1990 Market Correction
Chart by stockcharts.com
A 12-month simple moving average is also plotted on the 20-year market chart. The 12-month moving average is a useful indicator used in Technical Analysis for highlighting market cycles.
As the 20-year market chart shows, the 12-month moving average flattened during the 1990 market correction, although it continued sloping upwards during the 1998 market correction.
The 1990 market correction was really nothing more than a significant pullback with no lasting effect on bull market.
Most investors new to the stock market are under the impression that the stock market only moves in the direction of the current market cycle.
In reality, the stock market moves in cycles and alternates between bull markets (where stock prices broadly increase) and bear markets (where stock prices broadly decline).
Fortunately for investors, bull markets are usually longer than bear markets. This means that stock prices spend more time increasing in value than they do losing value.
Bull markets last anywhere from two years to around a decade, whereas bear markets are shorter and usually last a year or two and sometimes three.
3-year Market Chart
The 1990 market correction is shown again with a shorter time-frame on a 3-year chart plotted as a weekly bar chart.
Chart 3yr: 1990 Market Correction
Chart by stockcharts.com
The shorter time-frame provides more detail. As the chart shows, the 1990 market correction occurred during the 1988-1999 bull market. The S&P 500 index lost 21% over a 3-month period.
Market Chart: Rallies and Pullbacks
The 1990 market correction is shown again with a 3-year line chart and two moving average indicators.
Chart MA: 1990 Market Correction
Chart by stockcharts.com
The above line chart for the S&P 500 index shows a 52-week (long-term) and a 12-week (short-term) simple moving average.
The 52-week moving average (purple line) turned downwards during the market correction that occurred during the 1988-1999 bull market.
The 12-week moving average (orange line) broadly identifies the rallies and pullbacks that occurred.
The market correction started in July 1990 (noted on the chart with the 2nd RH - which stands for Relative High) and the sell off quickly bottomed in October 1990 (the 2nd RL - Relative Low).
With normal bull market behavior, the S&P 500 index makes consecutive higher RHs and higher RLs. As the bull market progresses, each new rally leads to a higher RL that the previous rally. Also each pullback leads to a RL that is higher than its previous RL.
However, in this case the RL dropped below the RL from the preceding pullback.
The 2000-2002 bear market finally ended the 1988-1999 bull market.