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Market Crash:  Bull-oney

Posted by kdadmin on September 8th, 2015.

Market Crash:  Bull-oney

Though I’m not a technical trader (making trading decisions based purely on market chart formations), I do pay attention to common market patterns in periods of uncertainty.

Like now, for example …

The graph above shows the movement of SPY, an ETF that tracks the S&P500, over the last year. The green line is its high point, the red line is its low point, and the purple line is the 50% mean regression. The dotted lines refer to the ACTUAL market low, not just the low close.

“Mean regression” is just a fancyway of saying, “two steps forward, one step back.” Typically, in volatile markets, an index will make a major move, like two weeks ago, and then slowly go back about 50%. The trick is knowing how far the move actually was. For example, the low point of the stock market was actually 1824, NOT 1872. The market just closed business for the day at the arbitrary number of 1872, but it was actually 50 points (nearly 3%) lower during the day.

The red dashed line indicates the actual bottom of the market. The purple dashed line indicates the 50% mean regression from that bottom, which is LOWER than the mean regression based on the closing prices.

Here’s why you care. If you still own equities in this market, these mean regression lines give you an idea of where the market is likely to peak, stabilize, or hover, until there is some new major economic news. In this case the regression lines are between 1980 and 2000. If you follow them back to just after the October 2014 crash, you will notice how they illuminated this pattern in the early part of 2015.

Now, smart investors doNOT use this as a trading signal. They only uses this as a reference of market sentiment. As in, “Hey look, everybody seems to get skittish around this price point …” More importantly, smart investors doesn’t get exited about market movements unless they break above the 50% regression point because they know these are usually false positives. Read more about false positives in my post, Sucker Punch.

In other words, all the holiday rhetoric in overnight media about “a big surge driven by the foreign markets” is just a bunch of bull-oney. It’s likely nothing more than a false positive, and a good time to remain in cash.

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