S&P 500 Update – Will Panic Lead to Bear Market?

The market is bi-polar … and so are many pundits covering the market. I’ve never seen so many analysts flip bullish (in December/January) and flop back to bearish (in February).

Everything that was gold a few weeks ago has suddenly become fool’s gold. Yes, investing requires a measure of flexibility, but flip-flopping is not a methodical or intellectually honest investment approach.

Rather than being dominated by emotions, I developed a comprehensive and objective new risk forecasting tool, the Risk Reward Heat Map (RRHM – methodology explained here).

The RRHM is a very in depth risk assessment tool designed to project risk (and reward) over various time periods. The RRHM boils down an avalanche of data into one simple chart.

Below is the very first RRHM ever published for free on iSPYETF (on January 9, 2020). As you can see, it projected a ton of risk for January and February.

The January 15 Profit Radar Report stated that: “Based on our risk/reward heat map, we are approaching a pressure period, resistance in time so to speak, a period of increased risk in January and February).”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

The January 27 Profit Radar Report clear warned of the following:

Here is what we know:

  • Under normal conditions, current sentiment extremes result in pullbacks, but momentum can trump sentiment and drive prices higher than expected
  • Markets that become over-extended to the up side, will eventually over-extend to the down side.”

The 2020 S&P 500 Forecast even mapped out the expected correction. The annual S&P 500 Forecast always includes a full year projection. While it wouldn’t be fair to subscribers to publish the full-year projection here, the chart below shows the projection up until now (S&P 500 performance updated) and for the next few weeks.

Obviously, this week’s pullback was quicker and deeper than expected. Only the kind of perma-bears who’ve been calling for a crash since the S&P was at 2,500 will claim that they saw this coming.

How Bad Will it Get?

As the weekly chart below shows, the S&P 500 created an enormous gap on Monday and kept going. Is this the biggest gap on the weekly chart ever? Not quite, there were a few in the 1940s and 1950s, but it’s the biggest gap since.

Support around 3,130 (2007 trend line) failed with next support around 3,030.

By many measures we are in uncharted territory and there’s no certainty about what’s next.

However, when looking at time periods similar to right now, I see the following common denominator:

  • Short-term: Volatility with bounces and risk of further weakness
  • Longer-term: Stocks market recovery, new highs still possible (even likely)

Since last Friday, I’ve run 15 new studies, indicators, signals (ISS), such as, what happens after:

  • Stocks suffer two consecutive days where 90% of stocks are down
  • Stocks drop from all-time high to multi-month low within 2 weeks
  • Stocks fall sharply and ‘save haven’ assets (gold, Treasuries) rise to new highs

The purpose of the above ISSs is to isolate market environments similar to this week and see how stocks performed in such situations.

The chart below shows the net change of the Risk Reward Heat Map based on just those 15 studies. Reward trumps risk in the long-term.

Although stocks may fall further (another bigger up/down sequence perhaps), based on an objective long-term analysis, this pullback appears to be an opportunity to buy at lower prices.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

 

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