Subtitle: The Big One?The S&P 500 has dropped sharply in the last two weeks leaving the broad average at a level first seen in the summer of 1998.
The bear market selloff has, thus far, been fairly orderly yet events of last few days seem to have instigated a dramatic level of urgency and panic.
My take is that given the current state of affairs, it seems altogether possible that instead of bottoming and making a bear-market rally run back up to the 50 or 200 day moving average, we may actually see a dramatic continuation of the decline.
There are REAL reasons to panic and the government’s continuous attempts to postpone the correction has only made the situation worse.
Postponing a full recognition of the economic crisis does nothing to address the actual problems at hand.
As regular readers know, I have been following along with the recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.
There are a host of very interesting technical similarities (which are noted below) that indicates that we have fully entered into another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.
It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.
At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.
Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.
Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.
As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.
It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.
THEN (1998 – 2000 Top)
- A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
- B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
- A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
- B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
