The recent selloff has been absolutely brutal. The market has gone into a sharp selloff that is very similar to the previous selloff in velocity and magnitude in October 2007. From 10/12/2007 to 1/25/2008 during a 15-week period, the S&P 500 declined from 1576 to 1270, a 19.41% decline.From 09/21/2018 to 12/21/2018 during a 13-week period, the S&P 500 declined from 2940 to 2408, a 18.09% decline. At the moment, it hasn’t shown any signs of a technical bottom yet. From what it has happened, it is hard to tell if the start of this selloff will result a 50% decline at the end of the correction, but it does show that a near term oversold bottom is close by. It is very likely that the S&P 500 will hit 2300-2350 level sometime in January. From that bottom it could have a 10-15% relief rally. 2600-2700 is a strong upside resistance.
The strength and duration of the relief rally will be a strong indicator for the next down leg. If it can rally more than 50% retracement, it will most likely indicate that a 2008 styled selloff will not happen. If indeed the relief rally is anemic, it could warn a pending larger sized third wave down. As we have blogged before, summer 2019 is the earliest possible time that this 4-year cycle could bottom.
Based on historical data, markets have fallen 20 percent or more without being accompanied by a recession. And, this correction may be no different.
In a bigger picture, we do believe that we are in a larger 17-year cycle that is very similar to 1982-2000. The present 17-year cycle started in March 2009. So this 2018 selloff could well be the half cycle of the 17-year cycle. It may feel quite painful for a while, but the spectacular top is around 2026!
Stay in cash for now and Happy Holidays to all our readers!