Over the course of the last month, the S&P 500 has moved lower to the tune of 6%. From what we’ve read, there were a lot of people on edge last week concerned that the Fed might raise rates, and potentially make the slide turn into 10 or 15%. This got us thinking what sort of correction would it take for this uptrend in the equity markets to be over? Cue the debate on what metric one should use to determine the end of a trend. (Anyone?)
For the sake of time and energy, we’ll use this chart that appeared on Reformed Broker’s blog, looking at the trend in terms of the Fibonacci Retracement.
The only thing you need to know from the chart below is that some people see a 38% drawdown (Fibonacci Retracement) from the start of the trend as in indicator that the trend is over. Conversely, some contrarians see the 38% Fibonacci Retracement as a time to buy into the market.
For those wanting to know how and why people use the not so arbitrary number of 38%, we already explained how the Fibonacci Retracement works through the lens of market metrics.
(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Reformed Broker
According the chart above, if you count 2011 as the start of this uptrend, then the market moved below the 38% earlier this month. It’s over and done with. If you count the start on the uptrend from where the market found its bottom (March 2009), then there’s still a lot of room left for the market to move down before the end of the trend can be called.
The chart suggests the end of the trend (if it started in 2009) would come if the market moved below $1730. For those doing the math at home, that’s an additional 12% move lower than where the market is right now. Factor in the 6% downward move we’ve already experienced and all the sudden you’re looking at an 18% move. Tack on another 2% and we would officially have met the criteria to be in a bear market.
This is of course if you’re basing an entire market off of one indicator, which we’ve sad time and time again, is a bad idea. On the flipside, it’s just as easy for someone to see a chart like this and think that there’s nowhere to go but up, which we’ve proved isn’t very consistent to begin with.
But doing nothing is a little bit like Jay Cutler leaving his team before halftime. The opponent’s defense is going to make adjustments (market volatility) and you need to be prepared with your best players (investments).