Is This Market Sell-off Done? Part 3


By Monish Chhabra ǀ June 15, 2020

In our last article on this topic here, we showed where the market (S&P 500 Index) stood with respect to its 2-year trend, as of 20th March, 2020.

The graph shows 3 coloured parts; blue for the longest, orange for the intermediate and grey for the most recent. Also shown are 3 dotted lines; blue-dotted shows the long trend, orange-dotted the intermediate trend and grey-dotted the recent trend. Finally, we show the two solid green lines that show the band within which this trend oscillates, connecting the peaks and the bottoms in price.

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) It had decidedly broken the band of the 2-year trend, after breaking through the 1-year trend earlier.

Six weeks later, this is how the market looked as of 1st May 2020:

By 1st May, we see that:

1) The market had clearly come back into its 2-year trend range (the green band).

2) It looked like peaking off, which would be a test of whether it can stay within the 2-year trend, or fall below the green line again.

3) We also note that the short-term grey-dotted trend line, which was pointing down very sharply in the March 20th graph, was now much flatter; however, still downwards.

Another 6 weeks later, this is how the market looks now as of 12th June, 2020:

What we observe on 12th June:

1) The market did not fall out of its 2-year trend range i.e. the green band. In fact, it continued to rise within it.

2) As we watch the orange-solid line rise from the bottom, all the way through the grey-solid line till now; each low is higher than the previous low, and each high is higher than the previous high.

3) We also note that the short-term grey-dotted trend line, which was pointing downwards until the previous graph, is now pointing back up.

Concluding from the three rounds of this article series, and hundreds of graphs over this time, we believe that the market downtrend that started in February this year, is likely over. We see no major statistical evidence to suggest that we are still going down as a trend.

The market fell out of its 2-year range for a short while, and then came back swiftly into the band. Ever since, it has been rising in a healthy manner; higher peaks and higher lows. It recovered so fast that the 2-year trend (the blue-dotted line) never once turned down through this entire period.

Of course, the market would pull back every now and then (e.g. over the last few days). Or, it may fall back into a downtrend again at some point in the future. Or, it may go sideways for some time. However, the risk of 50-60% loss in the markets – which was very real in March – isn't much probable now.

The economy is where it is. And the disconnect may seem odd. Yet, if we see what the stock market is showing us; the February 2020 sell-off is done.

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.