2018 has proven to be among the most volatile years in the stock market. This is especially jarring after 2017 was one of the lowest volatility years on record. Unfortunately, the Santa Rally that normally marks the end of each year and beginning of the next seems all but certain to skip the 2018/2019 season.
Over the past few weeks, our indicators have broken down further and we closed two days in a row below, not only the minor support level of 2,630 on the S&P 500, but also the previous low of 2018 at 2,582. When a major support level is broken after being tested multiple times we can estimate how “bad” things are likely to get.
One method that we like to use to establish an estimate is to take the most recent market high, in this case that would be 2,930.70 – reached only last September, and find the difference between that and the first major support level. The number of points in this case is 296.13. We can double that to get our target drawdown at roughly 2,335 on the S&P 500.
That represents an 8.1% further projected drop from Tuesday, December 18th’s close. The target low is just below a 20% technical bear market. The 2015/2016 correction was only 13.26%.
While it is likely that this means that Santa is not going to be holding his annual Santa Rally for the stock market this year, we can take some comfort in other facts. The biggest comfort is that it does not yet appear that the United States will enter a recession any time soon. This is of course, predicated on the Federal Reserve not going too far too fast with their rate hikes. However, it is widely anticipated at this point that the Federal Reserve will pause interest rates at least for a while at the beginning of 2019, and that the economy will only slow and not shrink. As that phenomena happens, stocks naturally become cheaper and will eventually be attractive enough that investors will clamor back into them.
As we have seen in the chart above, following a major stock market decline, often times the market tends to reward investors with an upswing and possible returns. Although this is never a guarantee, this historical trend could be the silver lining.
Some things we are looking for as we look for a bottom, is for the market sentiment to worsen, and the volatility index to spike. Those two signs are key to establishing a healthy bottom. Think of the market as a sick child. They are miserable and feel worse and worse until the inevitable, often messy ending. However, like a quick flu, once the terrible and ugly purging happens, they feel much better, fall asleep and recover.
Every market correction can be a little different, and we must continue to monitor things. Having most of our indicators now looking bearish for the short term, we will begin looking for evidence that we can keep this to simply a major market correction and not a more sinister market that is associated with long lasting bear markets or recessions. There will most certainly be more information we can analyze in coming week and months.
Despite these seemingly grinchy words, it is important to remember that the market changes rapidly and you should not let that get in the way of enjoying family and the season. Those are two things that are far more important, especially since investors can likely expect the market jitters to pass in the coming months (assuming no recession). Despite that, taking a longer-term view of things often helps as well!
We hope that you and your family are well this season and that you can relax and enjoy the most important things in life! BCJ would like to thank all of you for your trust and friendship this past 2018 and we look forward to a much better 2019!
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