October is known for market corrections and this Fall did not disappoint with a 10% correction in the SP500 (TSP C fund) and a 15% correction in the non-sp500 small caps (TSP S fund). The correction started elevated above our primary price channel and its bottom compared to both the Britex and Election lows and well below our primary price channel in blue.
By comparison, the SP500 correction low (so far) is well above the 2016 correction established lower trend line. The one-data-point 2016 trend line saw the global central banks step in to prop up the markets and then ultimately send them over 1929 and 2000 market valuation levels in 2018 by many measures.
The Federal Reserve which has helped back-stopped all major
free market corrections since the financial crisis told us the drop did not worry them. A changing of the tune – also called a “big hint”.
This amount of damage takes time to work off. All market corrections of at least 10% since 2011 have retested their lows in 3 – 7 weeks. Including the correction in 2007.
In 2007 the initial 10% correction and 7% bounce all matched the market “correction” footprint. Except in 2007 it failed the retest. And no one likes a failure – the SP500 went on to lose 56% from the market top.
If you are nervous about this market, you should be.
But wait, what comes after Fall? Christmas…
I believe this market will retest its lows, if it does not retest by Thanksgiving then it will probably wait until after Christmas.
While it could test the lows in-between these dates, the end-of-year strength of the market kicks into high gear in about a week or so. There are a lot of names for this time frame with the most common being the “Santa Rally”. While I did not invent the term, I researched the concept and wrote the Santa Claus Rally Guide to make some cents of it.
The end-of-year strength will play a roll in the next 6 weeks of trading. If this period of time is weak, watch out in 2019.
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So will our market fail its retest this time and when will it occur? This is the type of discussion I have in my market commentary and when necessary via email alerts.
Unlike market technicians, I look to see what the smart risk-sensitive bond investors are doing because their actions can tell us if they are calm or if they are running for the exits.
We also rely on our TSP trading day almanacs to improve our investment decisions.
Categories: Perspectives, TSP Charts