By Craig Hemke
Since August of 2015, we've been following the decline in U.S. equities and marking the similarities to the previous market collapses of 2001 and 2008. We'd suggested last autumn that there was one, final indicator that we needed to see before issuing a final warning. Well, here you go.
Before proceeding, I urge you to review the link below. For proper context, it is extremely important that you do so:
And, again, this update comes with the same caveat/disclaimer that we've included in each of these posts since August:
<All of this comes with an important caveat. Though there was certainly some Central Bank market manipulation in 2001 and 2008, it was NOTHING compared to what we see today. Will cycles and history be too much for the CBs to overcome? Instead, will their almost daily interventions be able to stem the tide? We're about to find out.>
Next, a copy-and-paste recap of the S&P action since August and the eerie similarities to 2001 and 2008:
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December 2000: Range was 9.72%. Final loss was 4.97%
January 2008: Range was 13.72%. Final loss was 6.38%
August 2015: Range was 11.64%. Final loss was 6.67%
Pretty startling similarities, wouldn't you say?
We then projected an October-November rally based upon the Green Candles of Hope in 2001 and 2008. These previous Green Candle bounces produced the following gains:
Late December 2000 - January 2001: S&P rally from 1254 low to 1383 high. Total gain of 10.3%
March 2008 - May 2008: S&P rally from 1257 low to 1440 high. Total gain of 14.6%
Late September 2015 - November 2015: S&P rally from 1872 low to 2099 high. Total gain of 12.1%.
As you can see, the market action in late 2015 was eerily similar to what foreshadowed the massive bear markets of 2001 and 2008. So, do the similarities continue? See for yourself.
After the Green Candle of Hope is early 2001, the market's bubble finally burst as the month of February 2001 saw a total S&P range of 11.7% with a final monthly loss of 9.2%.
After the Green Candle of Hope in the spring of 2008, the market's bubble finally burst as the month of June 2008 saw a total S&P range of 9.4% with a final monthly loss of 8.6%.
After the Green Candles of Hope in late 2015, did the market's bubble finally burst? The total S&P range in January was 11.1% and the total monthly loss was 4.8%. However, without the startling announcement of negative interest rates by the BoJ on Friday...spiking the USDJPY and taking the S&P futures with it...the total loss for January would have been 7.1%.
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We first published the chart below on 12/1/15. Please take a good look:
The following text accompanied the chart that day:
"In both 2001 and 2008, the door was slammed shut and the S&P collapse began in earnest when the 6-month moving average bearishly broke through and moved below the 24-month moving average. On the chart below, you can see that this occurred immediately following the previous "green candle" periods. And, once this happened, all heck broke loose."
So, has the door slammed shut? Is all heck about to break loose? Well, according to the criteria laid out above...yes.
Below is your latest, updated S&P monthly chart. If you look closely, the 6-month and 24-month moving averages have, indeed, bearishly crossed:
So, where does "the market" head from here and what should we expect next? Well, if history is any guide AND, given all of the similarities to 2001 and 2008, perhaps you should consider the following:
- The 6-mo crossed the 24-mo in early February of 2001. The S&P 500 began that month at 1365.67. March of 2001 saw an intra-month low of 1081.19. That's a drop of 21%. With the bear market now well underway, the decline continued into October of 2002, ultimately reaching a low of 768.63. This marked a total drop from the MA cross point of 43.7%.
- The 6-mo again crossed the 24-mo in May of 2008. The S&P 500 began that month at 1385.97. July of 2008 saw an intra-month low of 1200.44. That's a drop of 13.4%. With the bear market now well underway, the decline continued into March of 2009, ultimately reaching a low of 666.79. This marked a total drop from the MA cross point of 51.9%.
If history repeats itself yet again...as it has with the recent action of last August, last October-November and again this past January...then we should now expect:
- A decline in the S&P over the next 60 days. This decline will very likely be in the 15-20% range, projecting a low near 1650 or so. From there, if the pattern continues, the S&P will continue lower, eventually falling to near 1100. Which, you'll notice, was our original forecast back in August of last year.
Again, though, all of this comes with the caveat/disclaimer listed at the top of this post. Perhaps you should re-read it now. However, past history sometimes IS an indicator of future results. Therefore, we'll conclude today's update with the same warning we issued a month ago:
At the end of the day, what you do with this information is entirely up to you. If you own stocks, ETFs and/or mutual funds in your regular accounts, IRAs and 401(k)s, it certainly appears that NOW is the time to be VERY cautious as history suggests that a major bear market in stocks is on our doorstep. Perhaps it would be prudent to take some time to review your current asset allocation and measure it against your risk tolerance and investment/retirement timeline. If another 50% drop in the "stock market" would decimate your accounts and ruin your retirement plans, it might be wise to consider taking some action before it's too late. Hope in central planning and central banks cannot keep global equity markets afloat indefinitely. Our study of chart candles and market history suggests that the next central bank "policy failure" may be right around the corner.
TF
