Technically Speaking – Is The Correction Over?

Over the last couple of months, we have been warning of an impending correction due to the massive extension above longer-term moving averages. To wit:

“Just remember, bull-runs are a one-way trip. 

Currently, there are just 200 points of upside until the S&P 500 hits a majority of its Wall Street targets of 3000.”

“I have taken the chart above and calculated several possible corrections and mean reversions to different levels.”

Well, as noted in the table above, the correction back to the 2018-bullish trend, a very high probability event, occurred.

While such an event has been expected, it still seemed to catch investors by surprise. Of course, given such a long period of upwardly trending prices with exceptionally low volatility, investors had been lulled into very high levels of complacency. The media had also fallen into the trap suggesting the one-day correction had been a major mean reverting event.

It wasn’t.

As shown in the chart above, all indicators remain extremely overbought and the market has not even reverted back to the long-term moving average as of yet. While the markets may indeed rally further, it is quite likely the correction that began on last week is not complete as of yet.

Furthermore, after such a long period of low volatility, the sharp decline in asset prices is one week FELT much worse than it actually was. 

This is important, and often missed, point about “passive indexing.”

While a 10% decline in the market certainly does SOUND bad, a 200+ point loss on the S&P 500 FEELS entirely different. This is where investors start making emotionally bad investment decisions where “passive investing” ultimately becomes “active selling.”

The “buy and hold” mantra is essentially based on the premise that stocks rise much more often than they fall, and since you are either too stupid, or lazy, to actually understand how investing actually works, you are just better off making investments and forgetting about them. Hopefully, you will win.