From January 4th, the S&P 500 has fallen close to 10%. A monthly decline of this magnitude has occurred 15 times in the last 50 years; and of those 15 times, 11 have occurred during recessions. We are not in a recession and our proprietary recession model currently forecasts a 4.3% probability of recession in the next 18 months (that is extremely low). Therefore, we don’t think this is the start of the next major bear market.
With that in mind, we have been monitoring a plethora of technical indicators to help us assess where we are in the correction process. We can compare current technical conditions to the conditions that were present at the bottom of non-recessionary corrections of 10% since 2010. The table below shows just a few of these indicators.
S&P 500 Decline | 3 Month Rate of Change | 6 Month Rate of Change | Stocks Over 50 Day MA | Stocks Over 200 Day MA | VIX | Trading Sentiment (0-100) | |
|---|---|---|---|---|---|---|---|
| 2010 | 16% | -11% | -7% | 6% | 31% | 46 | 11 |
| 2011 | 19% | -14% | -13% | 1% | 9% | 48 | 13 |
| 2012 | 10% | -4% | 0% | 13% | 44% | 28 | 15 |
| 2015-16 | 15% | -7% | -7% | 10% | 19% | 29 | 12 |
| 2018 | 20% | -14% | -8% | 2% | 10% | 37 | 6 |
| 2022 | 10% | -6% | -2% | 29% | 45% | 32 | 16 |
Source: Stockcharts.com and Ned Davis Research as of 1/26/2022
[From a rate of change perspective, we are currently experiencing a quicker but less advanced decline in terms of time. Breadth has significantly deteriorated although more breadth deterioration is possible before we reach a bottom. However, sentiment is very pessimistic, and investors are pricing in a large degree of volatility. Could equities continue to decline from here? Of course, they can. Midterm election years tend to remain very choppy for the first half of the year. But as we see it, we are in the final innings of this correction.
Sean Dillon CMT, CFTe®
Vice President of Investment Strategy
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