What is the max we can crash?

Hi guys,

What do you think is the maximum amount the market can go down from the top? 15% 20% 25%?

from 30% to 60% is entirely possible.

40% seems likely. If you believe in the virtues of technical analysis, there is a strong base of support around 2082 for the S&P500 which maintained as support and resistance for the better part of 2015 and 2016. Going from peak to that level is about 40%.

I think 20% minimum regardless. We will see what happens when lows from end of February are retested. If selling pressure is low perhaps the market will find a bottom. If not we will probably blow through that threshold. I expect us to blow through as the news turns more negative.

My take:

Possible is everything, the question is what is probable:

50/50 Chance that we test December 2018 lows. Or we rally a bit from here and sideways for 3 Months. Then a beautifull rally where small-cap value momentum makes 70%-150% in 12-18 Months. New ATH for that kind of ports December 2020.
This is 2011 / 2018 style of a DD.

10% Chance of a 2008 kind of DD.

Since I can not time this, I stay long 100%. 50/50% is good enough for me!

My take on the Virus:

https://twitter.com/GfI_Himmelreich/status/1236569791198113793

I’m continuing to nibble every week and continuing to trade my strategies. This shall pass. It may take some time but the future will be better.

Same with me as well, I’m still trading. Any ports I had invested before the correction I’m still long. Had a few new strategies nearly ready for deployment, however these will remain on the sidelines until the storm is over, or I may play at timing the bottom (smaller ports).

I do believe this reaction is overblown, my optimistic sides sees this resulting in a quick rally once the market comes to its senses (which is why I’m still long). Again the $1M question, when? Who knows.

Worst case, this pandemic will not be contained and the drop in the markets will be the least of our worries. Note that I find this to be very remote.

This reaction is not limited to the financial markets. Basic necessities are selling out to the extreme in local grocery stores.

Let’s ride it out and hope for the best.

Stocks (SPY) are only down 12% since the February high, giving up the gain since Nov-2019. If we get a nasty recession be prepared for a lot more losses.

For the last 7 recession average Drop of SP500 from Peak to Trough was -35%, max= -57%, and min= - 17%.

Georg,

Agreed. I think people should be psychologically prepared. To me it’s just numbers on a screen so I will be able to tolerate whatever the market does. I also have gold, treasuries, and far out puts, so my losses are limited in a 1929 type event. I do still believe when all this rolls over no matter how bad it gets that the future will be brighter. That’s why I invest.

I’m in the opposite camp and raised cash over the last couple of weeks and opened QQQ puts. The puts are at about 3% of portfolio value and just enough to take the sting out of recent decline. That is, I’m losing less money than I normally would. If the market quickly turns, I’ll happily forfeit that 3% - but I expect to be able to recover some of it.

The coronavirus caught US health organizations flat-footed with poor surveillance and testing. Genomic study of the virus suggests that’s its been in the Washington state area about two weeks prior to the official estimate. The next couple of weeks will be telling. I think we can potentially see 3x to 5x the number of fatalities over the last flu season, plus the “normal” flu fatalities. The concern is that the case fatality ratio (CFR) is function of healthcare capacity. If enough people need hospitalization, the effective CFR could go much higher.

Wash your hands often, too.

Walter

We haven’t seen capitulation yet. Tomorrow will be an interesting day. We seem to be following a pattern. If I have correctly identified the pattern and we continue to follow it, tomorrow (Weds March 11) should be a big down day. As much as 6%.

In any event, either the the 200-week MA or 10% below the 18-month MA has stopped just about every major panic uptrend correnction in its tracks. 1987, 1990, 2011, 2016, 2018.

Bear markets happen when stocks trade below the 200-week or 10% 18-month envelope for any extended period. See 1981-82, 2000-03, 2007-09.

Both the 200-week and the 10% 18-month envelope are in the mid-2600s. I expect to test that area within weeks, if not days. If we test it, and it fails, look out below.








Yes, capitulation hasn’t happened. So far, we have had normal revaluation and the coronavirus is an extraordinary event. I anticipate further declines. Attached is the SPY with 200 week SMA (purple), various anchored VWAPs (blue), plus volume-by-price bars. Both the SMA and one of the anchored VWAPs meet around 260.

Walter


Walter,

I agree. I think we either bottom out at 2018 bottom or find a bottom at 2015-2016 levels of 2000 with a possible retest into 1800 territory. I suspect we will more likely test the 2018 bottom, blow through it after a short pause and less chaotically sell off to 2000. I think a 40%-50% decline from the February 2020 peak is more than reasonable given the high valuations and extraordinary circumstances of the coronavirus with the added energy sector distress. A larger selloff could be possible as well. Of another note, there is not support or resistance built up during the 2017 gains. I wonder if retracing that movement down will be the steady but less chaotic final stage of the bear market as the selling pressure continues but after most weak hands have capitulated.

This is of course all speculative and I don’t claim to know any more than anyone else, but it’d be interesting if this how it turns out.

Jeff

50/50 of 2018 bottom, that would mean a PE of the SP500 of about 13, with more QE and Interest Rates lowering, that is dirt Cheap!!!

10% of 50% DD.

By the way I reiterate my secular bull market case for the US!!!

Its not the time to be bearish after a 20% DD, its time to be bullish.

Yes, 10% more are in the cards, but we are close to the bottom!

Best Regards

Andreas

Speaking of PE, I grabbed this off of twitter.


No, no, no . . . We’re already seeing huge drops in human activity that have not yet worked their way into GDP numbers or corporate earnings. You have to assume big drops in estimates and/or negative earnings surprises, and that the “actual” market P/E is much higher.

Folks, close the excel files and lock your calculators in a drawer. There is much that remains unknown but one thing Is completely certain: We are now in a time when ALL statistical analysis is 100% worthless. It won’t be this way forever. But it is for now.

This is now a time to be managing personal risk, re-evaluating portfolios in light of what we’re learning (Do you have debt-heavy energy companies in your portfolio? Watch out. That’s the emerging 2008-style crisis — the downside there is zero), building/refining watch lists, and monitoring unfolding real-world events and market sentient/activity.

At this time, you should be spending a helluva lot more time in the p123 panels than in the screens, ranking systems, sims, etc. And start looking at the companies you’re holding . . . one at a time.

If you want to use this time productively, use it to study up on the portfolio123 panels and how to customize them. Read Chapter 7 of the A to Z guide that’s under the Learn menu. Do it. The worst thing you can do in a down market is come out with a skill set that is no different from the one you had going in (because each one changes the world in its own way and requires a different knowledge base on the other side). So use this time to learn, learn, learn and then learn some more.

Marc,

I think most of us already get this. But the question is whether the demand will be deferred (obviously not totally). And whether we will see a V-shaped or U-shaped or L-shaped recovery. Or maybe it will trigger a recession.

I agree with everything you say. Can you expand—even with your own alphabet of recovery shapes if you wish;-)

Best,

Jim

As we have become more services oriented, there is a larger portion of the economy in which demand happens or doesn’t happen but cannot be deferred. A year or so after we’ve come out of it, we’ll probably have a sense of the %. But for now, nobody knows (probably because nobody saw a reason to compute it.

V shaped recoveries have been the case lately. I think the market has too much institutional and computer generated activity to allow for a U — unless the downside drives enough algos out of business). Don’t jinx us by thinking about the L . . . We sure as hell don’t want any part of that. But if we get one, unless a lot of institutions and algos vanish, the other side of an L, however long it takes to get there, is liely to be close to 90 degrees up . . . For those who can get to that point. Ultimately, hope for the V but watch out for the R-shaped or W-shaped patterns.

(There is no such thing as an R-shaped recovery — I just wanted to make sure you were awake!)

BTW, don’t forget to watch the election too. Sanders’ diminishing fortunes make for at least one good item of market news . . . But then again, longer term, we will have to be concerned about the strength he has shown among the youngest voters. (Can anybody spell A-O-C?) But if Biden can actually win and stabilize the political climate, that could take a lot of bite out of the extreme left. What we want is a moderate bull market . . . The rise of the extreme left is a direct consequence of all the fundamentals that gave us the super bull — every gain in margin (cost cut) minted a newborn socialist . . . That sort off thing. I hope Andreas is wrong about the degree of his bullishness . . . We won’t be able to get to that without strengthening the post-Sanders “Democratic” Socialist movement and possibly pushing them into dominance and . . . Think of the name of the NFL team in p123’s home city. (If you’re not a football fan, go to Wikipedia.) We badly need and should hope for moderation.

There’ s a lot happening in the word. A lot to watch. A lot to evaluate.

Thanks for sounding the alarm, Marc. I agree with everything you say.

There are all sorts of ramifications. Presidents tend not to get relected after a shock (Ford, Carter, Bush1). Kyle Bass is concerned about another banking crisis overseas like we saw in 1998, as many European and Asian banks remain highly levered. Corporate debt downgrades could spark untold trouble. On the health front, America only has 340,000 empty hospital beds for a population of 340M. The virus could overwhelm that in a hurry. Even if it burns off, there is the second wave to worry about.

With regard to Walter’s chart, 10x PE at 1800 is a possibility. Perhaps within weeks.

Here are some weekly charts showing the 200-week MA and the 10% 78-week MA envelopes.




Disregard.



It’s so hard to guess the market direction now. We don’t know. Like, is it possible for the western world to use the approach China uses to slow down the virus. I’m market natural now but decided to liquidate this week. Too much going on now, fiscal policy, virus news, very difficult apply models in it. Even market neutral I feel it’s hard to control because of the volatility and easy to lose money as well.
However, I did use 1.5 year LEAP to buy a few assets I think it’s definitely under value. For example, TSM.
As Marc suggested, it’s time to study. Maybe use small portion of money to play a few strategy for fun.

Terry