Has This Sell-Off Reached A Bottom Yet?

Everyone wants to know if this sell-off has reached a low or bottom yet and what to expect over the next 30~60+ days. Since October, the US stock market has reacted to the US Fed raising rates above 2.0% with dramatic downward price moves. The latest raise by the US Fed resulted in a very clear price decline in the markets illustrating the fact that investors don’t expect the markets to recover based on the current geopolitical and economic climate.

Over 5 years ago, we developed a financial modeling system that attempted to model the US Fed Funds Rate optimal levels given certain inputs (US GDP, US Population, US Debt, and others). The effort by our team of researchers was to attempt to identify where and when the US Fed should be adjusting rates and when and where the US Fed would make a mistake. The basic premise of our modeling system is that as long as Fed keeps rates within our model’s optimal output parameters, the US (and presumably global) economy should continue to operate without massive disruption events unless some outside event (think Europe, China or another massive economic collapse) disrupts the ability of the US economy from operating efficiently. We’ve included a screen capture of the current FFR modeling results below.

This model operates on the premise that US debt, population, and GDP will continue to increase at similar levels to 2004~2012. We can see that our model predicted that the US Fed should have begun raising rates in 2013~2014 and continued to push rates above 1.25% before the end of 2015. Then, the US Fed should have raised rates gradually to near 2.0% by 2017~2018 – never breaching the 2.1250% level. Our model expects the US Fed to decrease rates to near 1.4~1.5% in early 2019 and for rates to rotate between 1.25%~2.0% between now and 2020. Eventually, after 2021, our model expects the US Fed to begin to normalize rates near 1.5~1.75% for an extended period of time.

Additionally, our Custom Market Cap index has reached a very low level (historically extremely low) and is likely to result in a major price bottom formation or, at least, a pause in this downward price move that may result in some renewed forward optimism going forward. Although we would like to be able to announce that the market has reached a major price bottom and that we are “calling a bottom” in this move, we simply can’t call this as a bottom yet. We have to wait to see if and when the markets confirm a price bottom before we can’t attempt any real call in the markets. You can see from our Custom Market Cap Index that the index level is very near historically low levels (below $4.00 – near the RED line) and that these levels have resulted in major price low points historically. We are expecting the price to pause over the next week or so near these $3.50 levels and attempt to set up a rotational support level before attempting another price swing. As of right now, we believe there is fairly strong opportunity for a price bottom to setup, yet these are still very early indicators of a major price bottom and we can’t actually call a bottom yet. If our Custom Market Cap Index does as it has in the past, then we are very close to a bottom formation in the US markets and traders would be wise to wait for technical confirmation of this bottom before jumping into any aggressive long trades.

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