The long-awaited correction begins. How much deeper?
In my previous September 13 post to Forbes, I said that the US stock market is at a tactical (monthly) decision point, but leaned lower due To weakening of internal market. Since then, the benchmark S&P 500 has fallen a further 3% and has now – at least according to our own internal measurements at Asbury Research – officially started a corrective decline.
Market insiders have turned bearish
One of the main changes between September 13 and today has been the weakening of our shortlist of key internals in the stock market, which we call the Asbury 6 (and presented in this previous report). The Asbury 6 is a combination of six diverse market metrics that we’ve paired together to look beyond the daily noise of the stock market’s ups and downs. to determine his actual state of health – in the same way that a doctor first checks the patient’s vital signs during a visit to the office before making a diagnosis. We see the “A6” as a pseudo lie detector test for the market. It helps us identify real and lasting market advances or declines from IT traps for investors
The table below displays the September 29th update for Asbury 6 and shows that all six constituent metrics are red, or bearish, a negative change from three bulls and three bears on September 13th.
Four or more metrics in one direction, positive (green) or negative (red), indicate tactical bias. The dates in each cell indicate when each individual constituent of A6 became positive (green) or negative (red). When all Asbury 6s are negative, the internals of the market are the least conducive to adding risk to portfolios.
The Asbury 6 has been in Negative status since September 14. As long as this remains the case, the US stock market will be vulnerable to a deeper decline.
Look at these key index levels
My first chart plots the S&P 500 (SPX) daily since January and shows a very unusual phenomenon that has occurred in the general market index this year. Blue highlights show that the index’s 50-day moving average, a major and widely watched trend indicator, has been tested and maintained an incredible eight times since January 29 before finally falling below on September 20.
The most important question is, now that the long-awaited fix has started, how far can he go?
The prices of financial assets are determined by human beings who buy and sell them so just like people these prices tend to have a memory. The green highlights on the chart show that the next likely stopping point for the declining index is at 4,238, which is 3% higher than the market and represents its benchmark high from May 7.
Below that, the next, most important level is at the 200-day moving average of the S&P 500, a major, widely watched trend indicator currently located an additional 5% below the market at 4131. The major uptrend for March 2020 of the S&P 500 will remain valid. above the 200-day moving average and a test of it, if in the middle of improved market internals as indicated by our Asbury 6, would be considered a new strategic buying opportunity (quarterly). If market internals remain weak, however, a dip below the 4131 area would indicate a major shift in the emerging downtrend and open the door to more serious market weakness by early 2022.
Remember: the previous bear market, the one before last year’s Covid collapse dates from 2007 to 2009 and caused the S&P 500 to drop 57% over a period of 1.4 years.
Follow the leader: Apple
The last chart I want to share with you today is from Apple, the market leader.
The green highlights in the top panel show that Apple has been resting just above its major March 2020 uptrend line since September 20, indicating that market participants see it clearly and recognize its importance.
Meanwhile, the bottom panel shows that Apple has already underperformed the benchmark S&P 500 on a quarterly basis of 63 days since September 17th. Whereas Apple tends to dominate the vast US market – and both NASDAQ
Weak market today = opportunity tomorrow
So, to recap, S&P 500 benchmark in early stages of long-awaited corrective decline, has already fallen 4% from the September 2 high, and is vulnerable to further weakness according to our Asbury 6 risk management model.
The next probable downside stops are currently SPX 4238 and 4131, which would equate to drops of 7% and 9% from historic highs. Therefore, a simple reversion to the 200-day moving average of the index would satisfy many market watchers’ expectations for a normal 10% correction – and could possibly present a great new buying opportunity. The key to all of this, however, lies in the kind of internal condition the market finds itself in if and when it falls into it, because the persistent weakness of market insiders and a drop below this major support would mark the start of a new bear market and the possibility of much more sustained suffering for investors.
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