Correction or Bear Market? A Look at the S&P 500

Earlier this week I wrote about the patter that was occuring in the Dow Jones Industrial Average. How about the S&P 500? Yes this index is also in a negative pattern at the moment. The key to interpreting risk is to answer the all-important question. Are we in a correction where the market declines 10 to 20% and then recovers or are we in a bear market where the market losses over -20% over a period of time. Corrections are actually healthy for a bull market. Bear markets are of course bad for investments. As a review, the S&P 500 is in a pattern that the 5 worst bear markets have started from. That doesn’t guarantee it will happen. It just is a warning of caution.

2007 to 2009

Rather than going through all 5 bear markets, we will just take a look at the last one.

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The pattern occurs where the market goes back and forth over a period of time and then starts a decline. You can see it in the above chart. The market is going back and forth between the two lines. Those two lines form a channel. Then the market falls out of the channel. This is the S&P 500. The Dow Jones Industrial average is in the same pattern as well as a 15 year megaphone pattern. You can read about that here. (ask me where to link it)

Let’s take a look at the current chart of the S&P 500. This was what happened on Monday of this week when the S&P 500 fell out of the pattern.

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You can see how the S&P 500 decisively fell out of that pattern.

Let’s take a closer look at 2007.

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That orange line shows how the S&P 500 fell out of that channel and then rebounded back up. This is what it looked like in a bigger picture.

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Now this is what it looks like today.

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It is tracing out a very similar pattern to 2007. The key is to keep a close eye on this chart. The best case scenario is that the market will recover back into that channel than rise out of it. The worst case scenario is a bear market. I will keep everyone posted in real time on this blog.

As a reminder, if you are concerned that you are not taking the right type of risk in your portfolio, I am always happy to review what you are doing. It doesn’t take very long at all. You can email me at bob@prudentmoney.com

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