Regime change or not?

Stocks continued to sell off last week and last year’s lows are being tested. Is this the start of a major bear market? Or is the correction all but over? To find an answer to this question we will take a look at the “adverse move ratio”, but let’s check out the current chart for S&P 500 first:

The market is testing major support. The MoM indicator has dropped to levels that are generally consistent with major lows. This means that even if we are in an ongoing bear market we would probably get a bounce here before dropping lower. The Earl indicator (blue line) is turning up already, suggesting we are near a tradeable bottom. The slower Earl2 is still going down, telling us it is still not safe (as if it ever is?).

Where do we go from here? The indicators start pointing to a rebound rally. Could we get more panic first, before that rebound starts? Yes, that’s possible. Once the Earl2 turns up as well we can become more confident that the market is indeed rebounding.

For a longer term perspective I am choosing this monthly S&P 500 chart, showing the adverse move ratio (AMR):

The AMR is an indicator I shared almost two years ago in this article , showing its history going all the way back to the 1940s. Even though it is a simple formula it has done a good job in detecting bear markets and major corrections. The AMR fell below 1 again last November, the first time this happens since 2011. Whether this becomes a long downturn like in 2001-03 and 2008-09, or just a brief hiccup like in 2011, remains to be seen. Long term investors have good reason to be very cautious, at least until the AMR climbs back above 1 again.