Biggest Bear Market of the Century Is Still on the Calendar

 | Jul 28, 2017 | 11:00 AM EDT
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First, let me thank readers of these pages for all your support and kind words of appreciation for the DSE (decision support engine). We are thrilled that it is making its way into many of your tool boxes of investing and trading strategies, where objective, empirical data can help balance out the plethora of subjective opinions that are often confused with probability-ranked outcome forecasting.

Some of you have asked for a follow up on our April 27 analysis (click here to review those details), where the DSE issued a "seize the day" warning to exit stocks, or prepare to await years for them to return to these levels, during which a 50%+ correction (if not even deeper) was highly likely. The questions mainly focus on the fact that since April's analysis, when the S&P 500 was near 2400, the S&P has pushed toward 2500 and whether that has changed our forecast.

The answer is absolutely, positively not. The rise from April 27 to current prices (2484 at Thursday's peak, before the reversal) is approximately 4%. That forecast contemplated a 50%+, multi-year slide that should take no prisoners. In fact, we even highlighted the potential for a test of 2500, explaining the extreme statistical anomaly that would be required to get to that level -- a thrust that would take prices three-standard deviations above the 200 day moving average. This move would press against the 99.7% extreme of normality, which is empirically impossible to maintain for more than hours to days.

Here's the monthly bar chart of S&P, updated to show the stretch above 2400, and test of 2500 Thursday. Notice that like the 2007 and 2000 peaking processes, the initial lunge into the pink sell zones were followed by small pullbacks, before the final thrusts to the, then, final highs of the multi-year rallies, which then inflected for multi-year declines.

This was the premise of our April comments, where DSE tipped its hat to 2500, which was not required, but couldn't (then) be ruled out, nor can it yet. In fact, 2600 can't be ruled out either, which would be the equal thrust measurement in the current scenario to those of 2007 and 2000. However, neither 2500 nor 2600 are needed to terminate this rise, which may have ended at the 2484 intra-day peak yesterday (July 27).

What is needed to raise the odds that the final highs of the rise off the 2009 crash low being in place is a clearly impulsive decline off Thursday's high, or whatever high arrives. Then, moving below the November 2016 "election" low would confirm that new highs are years away, if not longer.

The absolute minimum expectation for the coming three to five years, based upon objective, historical chart pattern recognition analysis (dating back 100+ years) is for the S&P 500 to fall toward 1500 +/- 100; a 40% decline from Thursday's peak. More historically valid, the 1000 +/- 100 should be expected.

Therefore, if you are like most of the herd, with most of their net worth and retirement funds in the stock market, the questions still remains from April, "do you feel lucky"? If so, lucky enough to not take some of your incredible profits of the past five years to the bank for a rainy day?

There's an old Wall Street adage that when complacency reigns, everyone gets wet. With the VIX, the crowd's current whipping boy, having reached the 8s Thursday, the most complacent reading in history, complacency is not just reigning, it's pouring!

So, yes, if you haven't seized the day yet, there is still time. As a safety level, those that will need their current net worth to live on in the coming decade, rather than half of it, 2100 is a fail-safe stop loss point that most of us should pay attention to. If you don't want to have 15% come off your current net worth before you pull the trigger, then exit up in this pink sell box, which was a good idea both in 2007 and 2000. That lower boundary of the pink box is 2300.

For updates on this analysis, as well as other trading opportunities, try Ken Goldberg's DSE Alerts service for free for a couple of weeks, or contact him at support@dsetrading.com.

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