Kamis, 29 Juli 2021

The Odds Say a Major Correction is Headed Our Way

Money & Crisis

July 29, 2021

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The Odds Say a Major Correction is Headed Our Way

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Graham SummersDear Money & Crisis Reader,

The market is now beyond overstretched by historical metrics.

One of the best metrics to determine this is the 20-month moving average (MMA). As the chart below shows, this line has served as a kind of “reversion to the mean” for the market anytime it’s too stretched to the upside or downside.

As you can see, today the S&P 500 is extremely overstretched above this line.

Chart: Monthly

But just how stretched is it?

The chart below tells us the S&P 500 is roughly 20% above this line. This is the MOST the market has been stretched above its 20-MMA going back for 20 years. Indeed, the only time the market was MORE stretched above this line was during the Tech Bubble!

Chart: Extreme Levels

Running back a full 50 years, there were only eight times the market became this stretched.

Chart: 50 Years

Five of them took place during the 1980s. Two of those lead to a significant correction of 10% or more. One was the 1987 crash. One of the two remaining saw the market chop sideways, and one saw it rip higher.

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Put simply, in three of the instances, the outcome was a significant collapse/crash. In one the market simply moved sideways, and in the last one the market rallied.

Chart: The 1980s

Of the remaining three instances in our 8 historical reference points, one saw the market move sideways. Another one saw the market correct over 10%. And the third saw the market rip higher.

Chart: the 1990s

Add it all up, and in FOUR of the eight times the market extended this far above its 20-MMA, we saw a correction/crash of 10% or more. In two we saw the market move sideways. And in two others we saw the market rip higher.

So, the market has a 50% chance of collapsing soon, a 25% chance of going nowhere for several months, and a 25% chance of ripping higher.

Which would you bet on?

Best Regards,

Graham Summers

Graham Summers
Editor, Money & Crisis

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