This post is an addendum to the regular “Twin Peaks” series as the recent retrenchment of the S&P 500 has been so dramatic that it deserves some additional attention.It appears that the S&P 500, now poised just 48 points above the March “Bear Stearns” lows, is set to crash straight through that low level on its way to a destination somewhere in the 1100s.
Readers should take note of the charts below and fully contemplate what this selloff represents and how remarkably similar the current bear market period is to the episode that followed the dot-com collapse.
There is a host of very interesting technical similarities (which are noted below) that indicates that we have entered another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.
It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs (and lower lows!) yielding a clear downward trend.
At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.
Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.
Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.
As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.
It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.
THEN (1998 – 2000 Top)
- A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
- B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
NOW (Today’s Top)
- A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
- B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
- C. Three prominent but decelerating peaks set up the top.
- D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
- E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
- F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
- G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
