So, a lot has already been said about the stock markets entering bear territory. Not here to talk about how far the market could possibly drop. But at the same time, yours truly would like to share what I think what we could very well see happen...
The funny thing with the markets is that, like humans, it has a fairly good memory of what happened in the past. However, it does not remember EXACTLY what happened, detail for detail. We remember recent events with better clarity as compared to events far in the past.
Legendary Howard Marks puts it succinctly as "The events of investment history don't repeat, but familiar themes do recur, especially behavioural themes."
Below, I share the chart of the S&P 500 index (cash), monthly, in log scale just so we can see the price action back in 1960s clearer. I've picked two significant decades (1960s to 1970s // 2000s to 2009) where we are facing comparatively similar economic conditions (high inflation, runaway commodity prices, soaring debts etc..).
Both times, we see the index enter into what we traditionally call an expanding wedge / megaphone pattern. Both times, these patterns lasted about 110 bars (3230 days to 3300 days) before we see the start of the famous multi-year rally creating new highs. Both times, the drops always happen a lot faster than the recovery. We're looking at a 2-year drop on average, followed by a 4–5 year recovery rally
At where we now stand, we could very well be seeing the 1st down leg of this broadening pattern. What this means is that this drop could last a modest 2 years on average followed by a 4-5 year recovery rally and then another 2 year pullback... The real multi-year rally would probably not be seen for another 7-8 years.
Should we really be at the start of a broadening wedge/megaphone market structure, the imagery that I would like to paint, would be one where market participants are all stuck crossing through quicksand and each prod forward cannot just be a blind hope that one has hit solid ground. It has to be a calculated and decisive one, that keeps us afloat rather than slowly sinking.
Thanks for taking time to read if you've made it here.
Trade safe and stay safe.
#markets #investment #trading #technicalanalysis #marketthoughts #thelaughingchartist
S&P 500 Index (Monthly)
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