The S&P 500 Is Now Down -15%. What’s Next For Stocks?

The S&P 500 is now down approximately -15%.

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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.

How bear markets start

If this is just a -15% or -20% decline, then you would obviously want to be a buyer here. Downside risk is approximately -5%, and the upside is much higher. Think risk:reward

But what you are afraid of is “is this the start of a -30% to -50% decline?” If the stock market tanks -30% and you buy here, your long position will get killed.

Let’s take a look at the previous 30%+ declines that lasted at least 1 year.

Here’s the 2007-2009 bear market. The S&P fell 20%, and then made a >50% retracement rally.

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Here’s the 2000 – 2002 bear market. The S&P fell 16.4%, and then made a 50% retracement rally.

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Here’s the 1981 – 1982 decline. The S&P fell 22.3%, and then made a 50% retracement

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Here’s the 1973 – 1974 bear market. The S&P fell 18%, and then made a 50% retracement rally.

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Here’s the 1969-1970 bear market. The S&P fell 18.3%, and then made a 50% retracement rally.

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So what do you see?

If this is indeed the start of a 30-50% decline, then the stock market tends to make a big 50% retracement rally after the S&P falls -15% to -25%

The S&P is currently down -15%

Know which side risk:reward supports

Mean reversion

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