Space Invaders, one of the earliest video games, is a good metaphor for what’s going on in the stock market. Seriously. Allow me to explain.

When I was younger, I loved Space Invaders so much that I bought the arcade version and put it in my basement. It was an endless source of entertainment for family and friends. You can still play the game online. Google even has their own version.

As most gamers know, Space Invaders is based on a simple idea. Malicious agents are trying to destroy the earth, and your job is to blast them out of the sky before they kill you. (Three times, for some reason.)

Here is a screenshot of the version now available on Google. I added some markers to enhance the metaphor.

Rules of the game

[Experienced players can skip this section]

Starting from the bottom left corner of the screen, that little green guy is you. Your job is to defend the world by killing those red, yellow, and white rascals above you. You have some protection in the form of the 4 green bunkers directly above you. You can move left and right, and shoot when you’re between the bunkers.

The red evil-doers are the infantry grunts. They’re easy to kill. Above them are the yellow Space Rangers, and they’re harder to kill. And above the Rangers are the white Alien Seals. They are really hard to kill. Finally, above all the soldiers is the Mother Ship. If you manage to kill her, you have succeeded in saving mankind from total annihilation. You become an instant hero. You will undoubtedly be invited to the White House, unless you took a knee during the Global Anthem at the start of the game.

The Metaphorical Meaning

I’ve been writing a lot lately about the death match being fought between two investor camps – the Dip-buyers and the Rally-sellers. This is nothing unusual in the long arc of market history, but it’s particularly notable today because of how long it’s been going on, and how overextended the stock market is.

Some of you may not agree that the market is expensive, and that’s the ethos of the Dip-buyers. Those among you who agree with me that the market is expensive are part of the Rally-sellers team. Let’s assign these teams to the Space Invaders game.

The way I see it, the Dip-buyers are the ones who are tasked with defending the market by bravely moving in to buy when the market is going down. In a sense, they are trying to shoot down the Rally-sellers who are attacking from above. The Rally-sellers are dug in at the 2872 level on the S&P 500, and they are defending it with a formidable force of soldiers.

The Dip-buyers are dug in at the 2581 level, and they have mounted surge after surge to push the enemy back. So far they have not been able to sustain their efforts and reclaim the high ground.

The Dip-buyers have one goal – blast through the Rally-sellers and retake Hill 2872. So far it’s been a long battle- 90 trading days or 131 calendar days (4.4 months). That’s the 21st longest stretch of days spent below the most recent high-water mark since 1950. And that puts this battle in the top 9% of all market corrections in terms of longevity.

Metaphorically speaking, how likely is it that the Dip-buying forces will succeed in destroying the Mother Ship?

To answer this question we have to look at two things: market history, which is rich with examples of similar episodes, and probability theory, which can take the lessons of history and convert them into probabilities of the two outcomes.

For the history part, I direct your attention to the 21 market episodes that involved long stretches of time “in the wilderness” or below the previous all-time high price for the market.

We now have some historical data that we can analyze and make some observations about. First, this is the 21st longest duration in the wilderness since 1950. I recorded 198 wilderness incidents of at least 10 days since 1950, which places our current one in the top decile of wilderness events. Why is this meaningful? Because once the market goes more than 10 days without making a new high, the median gain over the next 12 months is 6.6%. The median gain for all days since 1950 is 9.6%.

The lesson I learned from this is that long stretches of time spend under water, or in the wilderness, tend to weaken the market for the following 12 months.

Here is a chart showing the 21 longest days spent under water, or in the wilderness as I like to say.

Going back to the Space Invaders Metaphor

One thing is obvious, at least to me. The Dip-buyers (the brave souls who are defending the earth from the onslaught of Rally-sellers) are losing momentum the longer they spend in the trenches. They have had several runs at the Rally-sellers and have managed to climb back to within 3.5% of the old high-water mark. But they haven’t yet got the job done.

I believe that the Rally-sellers still have the upper hand. They have more firepower (large institutions, short-sellers, high-speed traders, etc.) than their opponent. They have high valuations on their side, rising rates, Fed tightening, and possible trade wars or maybe even a nuclear confrontation with North Korea or Iran.

What the Dip-buyers have going for them is a steadfast belief that Trump will deliver on his campaign promise to bring back high-paying factory jobs, rescue the coal industry, and work tirelessly for the working class to restore America to it’s long-lost position of strength, leadership and greatness.

Final thoughts

This battle between the two opposing forces is fascinating to watch as it unfolds. If I were a betting man, my money would be on the Dip-buyers, and here’s why. I believe that the Mother Ship who sits at the top of the screen is controlled by the Smart Money. These are the big institutions who have the best information, best resources, best industry contacts, best research staffs, and more determination than the Dip-buyers. I think most of the Dip-buyers are retail investors who are optimistic and committed to their cause, but they just don’t have the firepower to take this market much higher. They will probably break through 2872 and chase the Mother Ship away, but it will probably be temporary.

This bull market could continue for another 12 months. But eventually, mean-reversion will come into play and there will be nothing that can stop it. I just don’t know when that will happen.