Authored by Lance Roberts via RealInvestmentAdvice.com,
“No animals were harmed during the writing of this article.”
If you listen to the media, the shocking and totally unexpected downturn last was unable to be foreseen by anyone. Thankfully, it’s now over and we can get back to the roaring bull market.
Or can we?
Mark Hulbert wrote an interesting piece recently stating:
“The stock market’s recent correction has been more abrupt than you’d expect if the market were in the early stages of a major decline.
I say that because one of the hallmarks of a major market top is that the bear market that ensues is relatively mild at the beginning, only building up a head of steam over several months. Corrections, in contrast, tend to be far sharper and more precipitous.”
His view is a common pushed out in the mainstream narrative as of late, but is based on a potentially flawed assumption the bear market began in October of this past year as shown below.
The decline from “all-time” highs took many of the persistently bullish commentators by surprise.
However, the topping process began long before October and, as shown in the chart below, the market was sending a clear warning that something was amiss.
As shown, the “blow-off rally” in January formed the left-shoulder of what would eventually become a “head and shoulder” topping process. For those not into the technical “mumbo jumbo,” this pattern of prices is similar to throwing a ball up in the air. Initially, the ball has a lot of momentum as it begins it rise. However, at a point, the force of gravity slows the momentum of the rise until, for a brief moment, the ball is motionless before falling back to earth.
Markets work much the same. Eventually, the momentum of the rise in prices becomes too far extended above long-term price trends, which act like gravity, and prices “fall back to earth.” The chart below shows the previous momentum driven rise and fall of the markets.
The yellow-shaded boxes denote the points where price momentum began to struggle to move higher. The lines in the bottom pane denote the change to price-momentum from positive to negative.
It is important to note that in late 2015, and early 2016, the market had begun a topping process that should have evolved into a deeper overall correction. However, just as longer-term trend lines were being violated, global Central Banks leapt into action with a flood of liquidity to offset the risk of a disorderly “Brexit” at a time the Federal Reserve was starting to hike overnight lending rates in the U.S.
While the “Brexit” issue is still ongoing, the risk to the market never actually matured. Therefore, the flood of global liquidity only had one place to go and drove asset prices skyward over the next 18-months.
However, today,...