Tuesday, August 09, 2011

Correction update

The decline of the S&P 500 index from its April 29 high is now 18% and counting, which is only 2% and 20 points away from triggering a bear market signal. This has wiped out the gains from the previous 12 months, and in the bigger picture yesterday's closing price of 1119 is a point below the closing price on April 2, 1998.

I'm very pleased to see the market decline like this, and I hope it continues. The stock market is still highly over-valued by historical standards, and even at these lower prices the dividend yield of the S&P 500 is barely above 2%. On a personal note it has been frustrating to sit on the sidelines in cash while the market continued to creep and occasionally surge upwards against all fundamental logic, so this is a psychological relief as well. My difficult choice to neutralize both bullish technical signals and bullish sentiment indicators with unprecedentedly bearish long-term economic fundamentals has, for the time being, been partly vindicated.

If this correction turns out to be the beginning of a bear market, then it was one of the stealthiest bear market onsets from the perspective of the technical methods that I use. The only analogous event I can think of is the market crash of May 1940 that came out of nowhere when Germany invaded France. Even the 1987 stock market crash sent a clearer precursor signal than the current decline. If the market turns around here against my wishes, it means ironically that the track record of my purely technical bear market prediction method will remain in good standing, so it will be a mixed bag for me either way.


linc campbell said...

So today establishes a higher high and yesterday failed to establish a lower low. What does that mean?

Jody Wilson said...

Hi Linc,
In my opinion it doesn't mean much. I don't think 3 days is enough time to create a useful pattern.

Cathy said...

"The only analogous event I can think of is the market crash of May 1940 . . ."


I just came on-board to check today's stock market.

One wild ride, Dr. Wilson.