Technically Speaking: Risk Of A Bigger Correction Rising

In this past weekend’s missive “Market Clings To Support,” I noted the early February correction process where we saw a similar short-term bottoming process where the initial bounce failed then bounced in mid-March before failing again to retest the February lows. 

On Monday, the market broke through the 200-dma which puts portfolio management on high alert. However, we have seen these breaks before where the market rallies back above support by Friday’s close. With the market deeply oversold, as we saw in February of this year, we want to give the market just a bit of room here.

This morning, futures are pointing to about a 1% loss on the S&P 500 at the open. Importantly, if the market fails to recover by Friday’s close we will be looking to reduce portfolio risk across the board as the risk of a deeper correction has risen markedly.

The chart below shows the current break of the bullish trend from the 2016 lows. You will notice the one-day rally failed at the trendline which has now turned that previous level of support into resistance.

This is a very early indication of a possible change in trend from bullish to bearish. I have mapped out corrections back to previous support levels.A correction back to this year’s lows would entail an 11.8% decline. A correction back to the 2016 lows would rack up a 38.2% decline from the market highs. Such declines, or larger, are normally consistent with recessionary drags in the economy and the market tends to be a leading indicator.

Let me clarify something before I go further.

In the media, and on Wall Street, there is an overwhelming push to classify views as either bullish or bearish. This is a VERY dangerous thing for investors.

The reason I say this is since, in the words of Bob Farrell, “bull markets are more fun than bear markets,” investors tend to seek out “bullish” commentary to support their “hopes” of a continually rising bull market. The danger, as I have addressed in the past, is that individuals become “willfully blinded” to data that does not conform to their personal biases. This bias of seeking out only “confirming data”,  known as “confirmation bias”, leads to decision making that is ultimately prone to error.

While I am often tagged as a “bear” because I point out the inherent risks in investing, I assure you I am NOT a bear. I am also NOT a bull. I simply look at the relevant data and make determinations of risk based on historical precedents and statistical data.