Jeff Gundlach Thinks That A Bear Market Has Started. Is He Right?

The S&P is now sitting at a 1 year low. And of course, traditional technical analysis states “if the S&P breaks below this support level, watch out below”.

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Let’s determine the stock market’s most probable medium term direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

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*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are walking blindly into the future.

Crash in December

It’s not common for the stock market to tank in December because of the Santa Claus Rally seasonality. When it does tank in December, that is usually a bad sign for stocks.

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Here’s what happens next to the S&P 500 when it drops to a 1 year low in December:

*Data from 1927 – present

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As you can see, forward returns are decidedly bearish 6 months later.

Here’s another way of looking at this.

Here’s what happens next to the S&P 500 when it has an intra-month drawdown of at least -8% in December.

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Once again, this has a slight bearish lean.

And lastly, this has been one of the worst declines in Q4. Big declines in Q4 are uncommon due to bullish seasonality.

Here’s every single case in which the S&P fell more than -13% in Q4, from 1900 – present.

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That’s a lot of bear market years. But interestingly enough, this isn’t consistently medium-long term bearish for stocks, because this often happened towards the end of bear markets.

Strong sell-off

Such strong sell-offs like the one right now is usually the setup for a medium term rally. Sentiment is fearful.

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