So far the SP500 matches the typical large correction footprint. Plunge 10% or more, bounce back 40-70%, then roll over for a retest of the correction lows. Sometimes the second low is higher, sometimes slightly lower – it does not matter. What we like to see from peak-to-peak or trough-to-trough is some sort of improvement in market internals and other risk indicators.
As I write the SP500 index, the DOW and the small cap stocks (TSP S fund) are back to their correction lows. The Nasdaq’s retest is coming in much lower, but the Nasdaq was the most frothy index and soared after the early 2018 correction.
My view is many investors decided to reduce risk by running into the bull market darlings – Apple, Facebook, the Googles, Amazon. Currently these stocks are catching back down to the rest of the market.
They say that history never repeats but it often rhymes. This is true of the stock market. Today we ask, will the market rhyme with 2015, 2016 and 2018. I put arrows on the next chart where I see similar patterns. If history repeats once again, we could see a bounce off lows soon. The end-of-year strength makes a perfect time for a rally.
The SP500 has some repeating patterns. Both the 2015 and 2016 corrections saw a “W” bottom and rallied hard. The early 2018 correction also had a “W” bottom but had a slow series of rallies. Take a look.
If the market rallies into the end of the year, many investors who are nervous now will once again stop worrying. The market has bounced back from every correction since the financial crisis. But bull markets end at some point and unfortunately it is the retail investor who hangs on too long.
I saw a report that a large percent of retired investors are sitting with over 90% of their funds in the stock market. This is not good. I’ve talked to former stock brokers who tell me they are thankful they did not sell during the financial crisis. Well yes that is good, but why did they ride the markets down so far?
There is a difference between timing every up and down in the market and watching for signs the bull market is running out of steam. One needs to reduce exposure at some point and stay out. Whether now is the time or not depends on those indicators that tell us if we are witnessing just another correction or the start of a Bear market.
What do you think?
Enjoy your Thanksgiving,