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The US Market Sell Off. Is this the end?

February 5, 2018

  • U.S. equities sold off hard last week.

  • Interest rates are on the rise.

  • But the Bull Market is still on based on yield curve

  • VIX and other indicators indicate that high risk investors can slowly get back in, but conservative investors should wait awhile.

 

The S&P 500 has become extremely overextended with low volatility after breaking out higher in late 2016. When markets become overextended to this degree, a pullback is normal, and there is no reason to believe that we are entering bear-market territory just yet. In fact, U.S. equities could pullback even further in coming weeks/months without dramatically affecting the long-term trend.

 

Market sentiment shows that as long as we don't go into a bear market, we are in oversold territory based on the last 2 big corrections in 2012 and 2014. Optimistic investors can start buying in, but cautious investors can still wait for the sell off to be absorbed into the market. History shows that after a big drop like this, a few weeks of consolidation / double bottom formations is typical.

 

Two quick points:

 

1) Though short term rates have been increasing, the yield curve is still not flat or inverted. This suggests that the bull market is still on.

 

 2) But we are expensive right now on certain measures, so a pullback and consolidation is not surprising. Below shows the US market cap over the US GDP. We are almost at historical highs and begs some caution.

 

 

3) Based on the historically bigger corrections in 2010. 2012 and 2014, some of the fear/oversold indicators indicating we are in the process of being oversold. Past history says that it's okay to wait a little.

 

 i) The $VIX is at the same levels as the troughs of the 2010, 2012 and 2014 corrections. This may trigger short term traders to come in.

ii) However, other indicators like the $SPXA50R (a breadth indicator) and RSI (short term) can still come down further. Hence, though we are getting into "step back into the market" levels, there is still room for a further drop or consolidation before resuming it's journey to take out past highs.

 

Cheers.

 

PS: Sorry I've been absent for sometime. Working on other projects at the moment.

 

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