Is This Market Sell-off Done? Part 2


By Monish Chhabra ǀ March 30, 2020

The market volatility has continued unabated since we published the first part of this article two weeks ago, here.

We provide a blow-by-blow account of how we see what has happened so far. We analyse the S&P 500 Index, on how things evolved week by week. We look at which trends were broken along the way, and zoom out to see which trends are still standing.

At the end of the week of February 14th, 2020, the market was on its high. The following graph shows the last 1-year price movement, split over 3 coloured parts; corresponding to the longest, medium and shortest periods of time.

The blue part shows the longest period; starting a year ago till now. The orange part shows the intermediate period; starting about 8 months ago till now. And the grey part shows the most recent period; starting about 2 months ago till now.

We show 3 dotted lines reflecting the trends of the respectively coloured periods. The dotted-blue line shows the average trend over the longest period. The dotted-orange line shows the average trend over the intermediate period. And the dotted-grey line shows the average trend over the shortest period.

Finally, we display two solid green lines showing the band of this trend. The top green line connects the peaks in price, while the low green line connects the bottoms in price. This band shows the zone within which this trend is moving and oscillating.

As of 14th February, we note from the graph above:

  1. The overall trend – as shown by the green band – was up.

  2. Not only was the trend up, it was rising. The intermediate-term dotted-orange trend line is steeper than the long-term blue one. And the short-term dotted-grey trend line is steeper than the intermediate orange one. The prices were accelerating upwards, over the last year.

  3. The price had hit past the top of the green band, and looked like they would break out of it.

This was a solid up-trend. There was no warning shot there yet.

And then suddenly the markets turned downwards. This is what happened over the next 2 weeks:

By the week end of 28th February, a great deal had changed in the graph above:

  1. The short-term dotted-grey trend line was now pointing downwards.

  2. The price fell back into the green band, then approached the bottom of the band and fell right through it.

This was the first sign of trouble; the markets were down by -13% at this point. They had to reverse back up quickly, to go right back into the green band, in order for the 1-year trend to continue.

However, that’s not what they did. The following graph shows what happened over the next 2 weeks. We zoom out to show the 2-year trend.

By 13th March, we observe:

  1. The price, after having decidedly broken the 1-year trend, was now at the bottom of the green band of the 2-year trend.

  2. The short-term dotted-grey trend line became steeper, and pointed sharply downwards.

By now the prices had fallen by, as much as, -27% from their peak. This was a critical level. For this 2-year trend to continue, the price had to stop falling much below this point, and stay within this band.

However, once again that’s not what happened. A week later, this is how the graph looked:

By 20th March, we see that:

  1. The price pierced right through the bottom of the green band, falling by -32% from its peak.

  2. The band of the 2-year trend was decidedly broken as well.

The markets then rallied back up by about +20% over the next few days. It raised some hopes that perhaps a bottom has been found.

To get a sense of where things stand now, we zoom out to the 14-year trend in the graph below.

We show 3 green lines, each of which reflects the bottoms of different trends over the last 14 years. These green lines present the possible bottoms for the current crash.

We have touched the first-low green line, and bounced off it. There is a 70% chance that this could turn to be the bottom. However, we need to see some signs for this bottom to hold:

  1. We want to see the next low point to be higher than the previous low point, and not significantly breach this first-low green line.

  2. We want to see the short-term dotted-grey trend line start to flatten, and then start sloping upwards at some point.

As of now, there isn’t much statistical evidence for us that this market sell-off is done. The price behaviour over the coming days and weeks would tell us whether:

  • the first-low green line holds the crash at about -35% loss from the peak (70% chance), or

  • we fall to the second-low green line at about -45% loss from the peak (20% chance), or

  • we test the 14-year bottom-low green line at about -55% loss from the peak (10% chance).

All we can do is to assess the possible paths we see, from where ever we stand. And then, let the market tell us what it wants to do.

In the meantime; pick wisely, carry the right weights, and be balanced.

This write-up is for informational purpose only. It may contain inputs from other sources, but represents only the author’s views and opinions. It is not an offer or solicitation for any service or product. It should not be relied upon, used or construed as recommendation or advice. This report has been prepared in good faith. No representation is made as to the accuracy of the information it contains, nor any commitment to update it.