The market’s history often provides clues to its future – we’re big fans of precedent analysis – so now’s a good time to delve into prior, similar instances to see what they led to [and, therefore, what we might expect in the next 2 months].
The above comments, and those below, have been edited by Lorimer Wilson, editor of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – register here) for the sake of clarity ([ ]) and brevity (…) to provide a fast and easy read. The contents of this post have been excerpted from an article* by cabot.net originally posted on SeekingAlpha.com under the title Market Meltdown: History Tells Us What To Expect and which can be read in its unabridged format HERE. (This paragraph must be included in any article re-posting to avoid copyright infringement.)
The past 4 market “shocks” (huge declines soon after a market top, with the decline coming within just a couple of weeks) look similar to what’s happened in recent weeks, as follows:
1. The decline in 1987 (see chart below) was much more extreme [than the current one] but we’re interested in the action after that. Measuring the recovery in the days after the crash, we see that:
- the S&P 500 recovered nearly 40% of its decline over 14 trading days before backing off and retesting its lows.
- The retest produced some positive divergences (290 new lows versus 1,175 new lows during the crash) and came 6.5 weeks later.
2. In 1998, when the Russian ruble crisis and the implosion of Long Term Capital Management crushed the market in July and August,we see that:
- the rally after the low recouped almost exactly 50% of the crash phase over three weeks (16 trading days) and
- a successful retest (933 new lows vs. 1,190 new lows at the first low) came 5.5 weeks after the initial low.
3. In the spring of 2008, which wasn’t the ultimate bottom to that year’s bear market but did lead to a few months of upside…:
- the initial rally only lasted 8 days before topping out, but it did make back 50% of the decline, and
- led to a retest 7.5 weeks after the first low.
4. In the 2011 plunge, brought on by the first European debt crisis (and U.S. debt ceiling battle)…:
- the S&P regained 50% of the July and August losses in 17 trading days, and then
- retested its lows 8 weeks later.
Putting them together, we see that the rebounds from these shocks tend to:
- gain back around half of the decline,
- last 2-4 weeks and then
- lead to a retest about 6-8 weeks after the first low.
Given the extreme panic readings seen last week (1,336 new lows on Monday, a spike in the VIX above 50) however, and the speed of the decline (45% of the losses in one week), this environment bears a lot of resemblance to the 4 above mentioned “shocks.”
Therefore, if history plays out, stocks will poke higher for another week or two before heading south and retesting last week’s bottom some time in October.
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