These Charts Say 2018 Was A Major Bottom

RECENT SIGNAL SEEN NEAR 2002 AND 2009 LOWS

As shown in the chart below, the S&P 500 Bullish Percent Index (BPSPX) recently completed a bullish turn that has only taken place two previous times since 1996. In late December 2018, BPSPX reached a rare oversold state denoted by the lower blue horizontal line. A significant shift in the perception of future economic and market outcomes pushed BPSPX all the way back to 83% on January 17, 2020. The two previous signals were completed in 2003 and 2009 (reaching upper blue line).

HOW DID STOCKS PERFORM IN PREVIOUS CASES?

The answer to the question above is quite well from a long-term perspective. Notice the S&P 500 makes very little progress in the six-month to one-year window, telling us to keep an open mind about normal pullbacks and corrections. The signal above speaks to the long-term outlook as evidenced by the average gain of 51.92% looking out four years from the date of the signals (high date in table below).

THE MOST IMPORTANT INVESTING AND STOCK MARKET VIDEO THAT YOU WILL EVER WATCH

One of the most important things in investing and trading is to understand a wide range of outcomes, from wildly bullish to wildly bearish. This week’s video tests six bearish concepts using historical data, allowing us to have a more accurate perspective of how markets operate in the real world.

THIS CHART SAYS A LOT ABOUT ECONOMIC EXPECTATIONS

Semiconductors are used in a wide variety of ways throughout the global economy, including in TVs, phones, computers, and automobiles. Therefore, we can gain insight into the market’s expectations regarding future economic outcomes by monitoring the performance of semiconductor stocks (SMH) relative to the S&P 500 (SPY).

The SMH vs. SPY pattern shown above is a head and shoulders bottom or an inverse head and shoulders pattern. From Stockcharts.com:

As a major reversal pattern, the Head and Shoulders Bottom forms after a downtrend, with its completion marking a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being shallower.

DAY BY DAY WITH REALISTIC EXPECTATIONS

It is easy to review a long-term bullish study and expect the market to be green every day, every week, and every month. We all know the S&P 500 experienced a ton of scary volatility between the October 2002 low and October 2007 high, which serves as a valuable reality check even if good things happen for a long period of time walking forward in 2020. Our approach assesses probabilities based on the facts in hand. If the facts change in a bearish manner, we must be flexible enough to reassess the odds. The charts and facts have been helpful numerous times since the December 2018 low; some examples are shown below:

• Similar Breadth Thrusts - January 2019

• The Never Happened in 1974, 2001, and 2008 - February 2019

• Updating January’s Rare Bullish Setup - April 2019

The Most Important Stock Market Video You Will Ever Watch

Rare Post-Coronavirus Signal Only Seen 12 Times In Last 30 Years

40 YEARS OF STOCK MARKET AND VIRUS HISTORY

Odds Of A Low vs. Additional Pain

DAY BY DAY BASED ON FACTS IN HAND

Market action Monday showed signs of high conviction to sell relative to the conviction to buy.

LOOKING AT WORST-CASE SCENARIOS

While a long-term uptrend remains in place, our goal is to navigate between a point A and a point B that could be several years down the road. Given normal pullbacks and corrections will occur along the way, having a realistic expectation about volatility is key when trying to stay with an existing uptrend. When we see an unbalanced tape, as we did Monday, it is prudent to develop profit-protection strategies and bear-market contingencies.

MAXIMUM PAIN

Since the January 24 video looked at historical market performance walking forward at fixed intervals (one month, two months, three months, etc.) and given the lopsided tape during Monday’s stock market sell-off, it is logical to examine maximum one-year drawdowns in the 47 similar historical periods covered last week.

For clients, the key takeaways are:

1. Based on the the nine recent stock market signals, the average maximum closing drawdown from the date of the historical signals was 4.29%.

2. Since the present-day cases featured signal dates ranging between 11/29/2019 and 01/24/2020, hypothetical drawdowns in 2019-2020 must be calculated from the signal date.

3. If we assume the S&P 500 made a pullback or correction high on January 17, 2020 at a closing level of 3329, the average hypothetical drawdown in 2020 comes to 6.14%, based on the historical drawdowns, recent signal dates, and the recent S&P 500 high.

As of Monday’s close, the S&P had dropped 2.58% from the recent closing high. Therefore, based on the historical drawdowns following past signal dates, there is roughly a 28% chance the S&P 500 has already made a low. Conversely, there is roughly a 72% chance the market has further to fall. If we look at the maximum drawdowns immediately following the historical signal dates (MAX DRAW FROM SIGNAL DATE column), there is a 45% probability the market has already made a low.

PROFIT-PROTECTION PLANS

In terms of protecting profits, it is helpful to understand if the market experienced the average historical drawdown, the S&P 500 would hypothetically drop to 3125 and reach that level on March 23, 2020. If the market experienced the median historical drawdown, the S&P 500 would hypothetically drop to 3132 and reach that level on February 14, 2020. The table above should be viewed in the context of the weight of the evidence, including a rare bullish DeMark signal covered in November 2019.

RESPECTING A WIDE RANGE OF OUTCOMES

The exercise above helps us better understand a wide range of outcomes, from the market made a low Monday to the market could reasonably fall for several more weeks. The data above will be used to develop prudent bird-strike/profit-protection contingency plans to complement the signals from the CCM Market Model.

NO ASSUMPTIONS, NO PREDICTIONS

Walking forward, our concerns and profit-protection strategies will be based on what is actually happening. If the conviction of buyers relative to the conviction of sellers returns to a more balanced state, then the probability of taking profit-protection steps will drop. Conversely, if the market begins to check off additional lopsided-conviction boxes in the coming days and weeks, our contingency plans will be adjusted accordingly.

As always, the market will decide. Our job is to monitor the incoming data with an open mind. The maximum drawdown study above helps us monitor new information with a data-based respect for a wide range of outcomes over the next one to three months.