Should the market correct? Yes. Should the market fall apart? I'm not so sure. That's why my call is for volatility.
One reason I am not so sure about the market falling apart right now is that I think sentiment will turn bearish in a hurry. It will take time (and price) to get the market to a good oversold condition, but I think sentiment will get bearish fast. Just look at how bearish folks got in my Saturday Twitter poll.
the results are in and folks are bearish.
In fact it is the most lopsided week we've had since I started doing this poll in 2020.Thanks as always for voting. You guys are fab to do so each week! pic.twitter.com/v2DKRauzTN
— Helene Meisler (@hmeisler) August 20, 2022
I would also note that the Daily Sentiment Index (DSI) for the S&P 500 is already down to 32 and Nasdaq's is 33. In the big picture, those are neutral readings, but if the S&P falls an additional 3% to 5% those readings will be in the teens in a hurry. We already know it takes a lot more than 3%-5% to get to a single digit Daily Sentiment Index, but once in the teens, we're getting close.
I want you to take a look at the chart of the S&P from 2001. I am not a fan of analog charts, mostly because everyone who does them seems to show them ending up in a 1929 crash. Also most analogs fall apart at some point.
I do, however, believe that patterns can often repeat in the market. Notice how in 2001 the S&P had a multi-month slide that lasted from the fall into the spring of 2002. That ended with a double-bottom that led to a rally into May. And then there was another slide that ended in the 9/11 low.
But it's the rally off the 9/11 low I want to focus on. It was approximately 20% and lasted a few months. But notice it did not die when it reached resistance. For five or six months it went sideways. Now, I grant you that sideways action was actually a 10% range. So the market fell 10% and then rallied. It wasn't until April 2002 that the market began plunging once again.
Now look at today's market. We had the initial slide off the highs, a double bottom way station and a rally in the spring. That gave way to a long decline into the June low. Then we got a multi-month rally.
My point is that when we look back, in hindsight the market in the late winter of 2001-2002 was trying to decide if things were getting better or worse, so it spent time correcting, trying to recapture the rally and correcting. For months.
Nowadays everyone wants instant gratification, which means the bears want the market to slide in one fell swoop, but notice it rarely does that, even in the first six months of the year. Maybe our market will spend some time trying to determine if things are getting better or worse, or even not as bad.
That's why my call is for more volatility not necessarily a move straight down.
