In last week’s update, I discussed the short-term oversold condition that existed at that time. To wit:
“As you will notice, the reflexive rally, and subsequent failure, have tracked the original predictions very closely up to the point. With the market once again very oversold on a short-term basis, it is likely that the markets could manage a weak rally attempt over the next few days.”
As you can see, the markets did retest the late August lows, and when combined with the very oversold conditions, led to a frantic “short covering” rally back to previous resistance. It is worth noting that the recent market action is very similar to that of the August decline and initial rebound as well.
Of course, the question that must be answered is whether we have seen the end of the current correction or is this just another “reflexive rally” that will fail?
The 2016 Recession And Market Reversion
To answer that question it is important to examine some statistical tendencies as well as potential artificial influences.
In January of 2014, I penned an article entitle “The Coming Market Meltup and 2016 Recession.” That article discussed several historical statistical precedents for such, at that time, an outrageous piece of analysis. To wit:
“However, looking ahead to 2015 is where things get interesting. The decennial pattern is certainly suggesting that we take advantage of any major correction in 2014 to do some buying ahead of 2015. As shown in the chart above, there is a very high probability (83%) that the 5th year of the decade will be positive with an average historical return of 21.47%.
The return of the positive years is also quite amazing with 10 out of the 15 positive 5th years (66%) rising 20% or more. However, 2015 will also likely mark the peak of the cyclical bull market as economic tailwinds fade and the reality of an excessively stretched valuation and price metrics become a major issue.
As you will notice, returns in the 6th and 7th years (2016-17) become substantially worse with a potential of negative return years rising. The chart below shows the win/loss ratio of each year of the decennial cycle.”
“The statistical data suggests that the next economic recession will likely begin in 2016 with the negative market shock occurring late that year, or in 2017.”
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