I only have reliable charts back to 1980, but I can tell you that since 1980, there are only 3 occasions where the markets got to this level of extreme selling – October 1987, July 2002 and this crash.
Today, the markets had an excuse to rally, with several Central Banks cutting interest rates over night and Wal-Mart being less bearish than expected, but the markets cut through support like it wasn’t even there. Sellers continue to swamp buyers and the markets continue to sell off hard into the close each day as mutual funds sell to cover what are no doubt massive redemptions.
Here is the market today
Here is The Crash of 1987
As you can see, The Crash stopped below the -25% band (Black Line). I have no clue where the market bottoms on this leg down. Anybody who tells you they know where things will bottom is making it up and you don’t need to bother listening to that nonsense.
But I can use past market moves to see how the market reacted once the selling stopped. In 1987, the S&P 500 fell below -25%, reversed for a few days, then retested the -25% band (2nd Black Arrow), then rallied back to the -15% band (Blue Arrow), then retested the -25% band again, before reverting back into the Mean (Green Arrow).
So the odds are high that after this selling panic stops, the markets will rally and then retest the lows for a while before they make their move back into the Green Line.
The same thing occurred in late 2002, as the S&P 500 spiked below -25%, then rallied, retested the Bear Market Low of July (Red Arrow), then tested the Green Line on several occasions, retested the July and October 2002 lows one more time in March 2003 (Red Arrow) and then started a new Bull Market.
The 1987 bottom took several weeks and the 2002 bottom took over 8 months to form. So I expect this market to see a bottom form over time. There might be a HUGE short term rally once the bottom is reached, but there will most likely be a retest of the lows after this rally.
The other issue I have noticed is that while the market was in these bottoming processes, the Green Line was falling. So when the market finally does revert back into the Mean, the Mean will be a lot lower than it is today. In 1987, the Mean fell 11.5% from the day the market bottomed, until the day the market finally touched the Green Line again.
Today, the Green Line is at 1300. 1300! While the S&P 500 is at 986…
It is just a guess, but my guess is that price and the Green Line end up meeting in the 1150 – 1200 range.
I expect the next rally to be highly shortable.
Today I moved some of my 401k money from cash into the S&P 500 Index Fund. I did not buy a share of anything for my clients. I did the 401k purchase, because I can only buy mutual funds at the close and it is more profitable to be a day early than it is to buy at the end of the day of the bottom.
The S&P tried to find support the last two days at 970. That level had better hold, or the markets will start yet another leg down. IF 970 holds, then I will consider buying it, because the first real resistance is at 1100. That is 14.4% from 970. If 970 fails, then I will wait for the market to try and build a bottom at some lower level and then look to buy a reliable set up.
Did I mention that 976 is the -25% band on the S&P 500 and 1103 is the -15% band? You can’t make this stuff up.
One of these bottoms is going to work. I’m just not sure which one. But I have to treat every attempt with the potential to be a bottom. I hope the bottom arrives soon, because I am exhausted.
The charts of the NASDAQ and the Dow Jones both have similar potential bottoms to the S&P 500. They will most likely all bottom in unison.
1 comment:
I guess there is an assumption that this bear market will behave like others although perhaps deeper and more prologued. However, is there a possibility that there is a structural difference with increased global financial interdependecies that deepens the panic, especially in Asia. I was talking with a couple of investors who have money in Jakarta and Hong Kong completely leaving the market and finding safe havens in government bonds that yield 7-8%. Their money will not likely be in play for quite some time as will others.
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