In my previous post, I noted that if patterns repeat and this is merely a correction we could have another 30 days prior to the final bottom. Since investors heavily exposed to stocks might be looking to reduce exposure in the near future, the following pattern may be of interest. In the chart below, I plotted three significant market corrections. While this is a very rough guide, it does present the possibility the market could attempt another rally in the next two weeks and present an exit point.
The black line plots the current correction through Thursday September 3rd. September 7th corresponds to day 12. There is no guarantee the pattern will repeat or that a retest will hold, but it does give us a sense of the timeline the other corrections underwent.
Of course if the pattern repeats, at day 20 you might be thinking the market is recovering and why would I sell now. As I mentioned, the final low or retest occurs six to eight weeks after the market breaks below its support line. In 1998, the market lost 9% from its day 20 peak. In 2011, the market lost 10% from its day 20 peak. In 2010, the market lost just under 7% from its day 20 peak. Timing the bottom is another challenge, but as also noted these dates correspond amazingly to when the TSP Smart Investor’s seasonal strategies look to re-enter in late October.
Day 20 is September 21. But we should be concerned that the Federal Reserve is going to follow through on their word and raise rates on September 17th. If they do, the market will react negatively. So reducing exposure to stocks on 16 September might be a good risk reduction plan and better correspond with the pattern’s timing. I would also consider any rally above the 28 August close a good time to lighten up on equities. For members following our seasonal models, I see no compelling reason to re-enter stocks until late October when our models look to re-enter and the pattern above has a chance to play out.
I go into further detail on the price patterns of corrections and the start of bear markets in my 4 September Interim Update for full access members. The above pattern assumes this is merely a deep correction in an ongoing bull market. This may not be the case. The difference in outcomes from a correction and bear market are significant and need to be played differently. I discuss cyclical indicators in-depth in our Current Situation Reports accessed from our TSP Smart Investor’s dashboard.
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Categories: Perspectives, The Smart Bird, TSP Charts