Here’s a 20 year chart that I have made annotations on over time. This ‘big picture” view shows us that the recent volatility is still just a blip on the radar. Study the recent short termed corrections like 2010, 2011, 2016 . You will note that they are usually driven by Fed related news. My point here is that market corrections (since 2009) of any significance have NOT been led by terrorist acts, political events or international catastrophes (manmade or natural). We have seen our share of tsunamis, flooding, hurricanes, terrorist acts, Occupy movements, country debt defaults or near defaults, nuclear bomb threats etc. None of these inspired a correction of much significance. It has been the Fed, and the fear of (or actuality of) its surrounding decisions, who have moved the markets. Fear of unplugging the stimulus drug drove markets to pull back– not world events. And that is what we have right now – a new Fed regime, and a new hawkish stance. The drug is being unplugged.
So—we have the “Fed-fundamental” factor in place that has, in recent history, helped the market move into corrective or bear market conditions. What about the timing of such a correction? Can chart patterns tell us anything about when a significant (20% +) correction will occur?
You will note that corrections since 2009 have been led by volatility. In other words, you get lots of chop before the real deal happens.
It is my opinion that we are in the “chop” stage that will lead us into a more significant bear market. I have noted here that my view is NOT for a biggie (i.e. a 50% meltdown) like the 2001 or 2008 bear. I’m in the 20-25% bear market camp. With that in mind – let’s look at the price patterns that proceeded 2011. For the record, 2011 was the closest to a “real” bear market correction since the 2009 bottom. For example – 2010 only saw a 17% selloff and 2016 only experienced a 12% peak-trough selloff, while we saw a 22% peak-trough selloff in the summer of 2011.
The chart below shows us both the 2010 and 2011 corrections. As noted above, 2010’s correction was some 17% peak to trough, and it occurred that summer. The 2011 correction was a hair under 22% peak to trough, and it occurred over the summer as well, although most of the damage was carried out into the fall.
Note that in 2010, there was an early corrective “setup” move of 9.5% in early February, a rally, and finally the greater 17% pullback that summer. This was darned close to a “bear market correction” of 20% – so its worthy of noting despite its failure to enter into the “20%” club.
Similarly, 2011 saw a 7.5% early corrective “setup” pullback in February, followed by a rally. Only this time, that rally was followed up by a another “setup” correction of over 8% in May. The market rallied, and finally pulled back over the summer by 22% – official bear market territory.
Subsequent rallies after each of these “setup” corrections deeked market participants out into buying high again. The pattern was for the markets to see some interim volatility before the real storm hit.
The chart below shows us this year’s moves. As you can see, February once again provided the market with a nice correction (almost 12%). As had happened in those prior years, markets rallied back in early March, although not to prior highs. Then, last week, another correction. It’s too early to predict that the market will rally back again, but Monday looks to have seen some strength.
Conclusion
As market participants, we are all playing a game of odds. The odds are, given my prior noted high Bear-o-meter reading, along with seasonal factors and past volatility patterns, that we will see one more rally before the summer. I will revisit these charts, and my Bear-o-meter, on this blog site regularly over the coming couple of months. It is my opinion that we are looking at a potential summer setup for a deep correction – possibly in line with that seen in 2011. Don’t fight the Fed, and history can repeat itself. Rather than view this potential with dread and fear – you and I can look forward to such a possibility as an opportunity to profit by trading the correction.
Stay sharp guys and gals – this is our moment.
12 Comments
As we approach this anticipated correction what are we looking at in terms of % sell-down of our positions or overall portfolio dollars in preparing to take advantage of the plunge as well as the followup time to buy.
Is your sense of the more current fluctuations in the market pre-warning of a May, or perhaps a closer to summer pullback?
Hi Jack
You could refer to my reply to Wanda from last Friday’s “special report” blog where I covered a bit of your question–but in a nutshell:
-it is likely we see a rally into late April or even early May. Timing of a sell is based on S&P level of 2800 OR a falling Bear-o-meter score OR a sell signal in my short termed system
…I pay attention to all three of them and I really cant say what will be the trigger–nor can I say when the trigger happens –for that matter there is a chance we get no trigger!
But for what its worth we always hold at least 15% cash into the summer, and typically raise that cash by May 5th — how much more than that 15% cash will be determined by the Bear-o-meter and Short Termed Timing model data.
This blog will help you understand the models a bit: https://www.valuetrend.ca/bear-o-meter-neartermed-timing-model-updates/
Hi Keith, when you say at least 15% cash does that mean your still 85% invested? Thanks Anthony
Right now we are fully invested (96% in).
Do you see any market outliers that might/should/could buck a general correction? I note that Cdn oil stocks continue to be rudely ignored even as oil has rallied.
XIU looks like its a good bet in a correction, as may be the staples
Both have been “dogs breakfast” for the past year–prime rotation candidates.
If the deep summer correction occurs, how do you see Canadian banks and utilities performing during the correction. Assuming a 20-25% correction would these two sectors correct by the same amount ?
Utilities should do fine–possibly outperform markets. Banks probably in line with the market but not better
Oh boy that big bearish engulfing candle today makes it look like the S&P will break below 200 MA this week possibly tomorrow.
If it does, count 3 days before assuming the bear.
Hi Keith, A 25% correction from 2800 level brings us back to the beginning of the Trump bump, or about 2100. Is that where you see solid support or somewhere in between ?
Bernie I haven’t set any targets for a correction–we need to see if it does in fact occur, from where, and where the nearest support levels below that start point come in. But trust me, I will be all over the blog with such notations as /if /when such a pullback begins.