To subscribers of my newsletter who received on Monday an equity exposure reduction before the market opened, this is a quick follow up message re key market price points.
The first price point for the S&P 500 is 1867, its closing low reached on August 25. This number is significant primarily in the minds of the more bullish among us: a stock market correction (10 to 20%) is all that the markets are going through AND a nice and neat test at or around that 1860 level would be healthy. Cleanse the system of those who dare to question the wisdom of traditional equity analysis and all will be well. From that level one could - and I would argue should - assume a bounce back rally will ensue, thereby buttressing the bull market correction belief.
The second, and far more significant, price level for the S&P 500 is 1704, for at that price point the S&P 500 will have experienced a 20% decline, which puts it in the wheelhouse of an "official" bear market. This number matters more - and subscribers to this newsletter learned in this week's report - because at that price point the probabilities jump nearly fivefold (from 15% to 73%) that a US recession will occur sometime in the near future.
Hard to believe? Certainly, considering the GDP numbers of last week and the Fed's strong view that rates must rise - not just for this year but well into next and the year after (a fact also provided in this week's report).
In next week's report, I will elaborate on the prudent investment strategy adopted thus far. Until then, the above price points will provide some guidance on what seems like the hard-to-comprehend stock market action of late. It's really not all that hard. And not that incomprehensible - if you know where and what to look for.
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