Market CORRECTION or Market CRASH?

I feel like I keep using the word “unprecedented” a lot these days, as well as the phrase “record breaking,” but that’s what the stock market keeps handing us.  We saw the fastest crash in U.S. history, followed by the fastest dead cat bounce in history, but I guess that makes sense, right?


It would be like taking one of those bouncy balls we had when we were kids, holding it out a shoulder’s length, and dropping it.  Chances are, it would bounce about 60-70% of the way back up to your extended hand.  However, if you climbed up to the top floor of your house and dropped the ball from the window, you’d surely see a bigger bounce, wouldn’t you?  I think that’s what we’ve seen in the stock market this year, thus far.


Understanding that what we’ve seen in the market has been truly unprecedented (see, there’s that word again!), let’s see if we can try to compare what’s happened so far in 2020 to a couple other snapshots in history.


First, the market peaked in February, and then it experienced that fastest-drop-in-history.  Then, it rallied big, just like a ball being dropped from the top floor.  Since then, it’s dropping again, but at least so far, what we’re seeing is just a “correction.”  The BIG question today is, “Will the market chop sideways and head higher from here, or will it head right back down again?”


Market crashes tend to last longer than 4 months, and that’s about all we’ve seen so far.  Everyone wants to see a short recession and a “return to normal,” but hope isn’t a strategy.  We have to make sure we’re looking at the big picture and “scanning out,” as opposed to focusing on the short-term fluctuations in the market (up or down!).

1-Today Market CORRECTION or Market CRASH?


Below is the stock market at the end of 2018 and beginning of 2019.  Here we experienced a big drop, a big rally, a correction (just like the today), and then a resumption of the former uptrend.  Is this how 2020 is going to resolve as well?


I think there is a lot of headwind when it comes to business closures, bankruptcies, temporary unemployment that might turn into permanent unemployment, and reduced demand.  However, the US of A is a proud and resilient country, so although I don’t know that I’d say the scenario below is “probable” in 2020, anything is always “possible.”


2-2018-19 Market CORRECTION or Market CRASH?


The next snapshot is the stock market in 2007-08.  In this possible scenario, you can see a drop, a rally, and then a correction.  In 2008, some might’ve said, “Is this the final bottom?  I can’t imagine things getting worse from here…”  The next snapshot shows the rest of the story, which most of us already know.


3-Short-2008 Market CORRECTION or Market CRASH?


So, the initial decline in the chart above is in the area I put a box around in the next snapshot.  You can see just how short four months is when you scan out and look at the big picture.  As you can see, after the market’s correction, it did rally, but the rally was short-lived… because shortly thereafter, stocks headed back downward again.  Today, we know we can blame the endgame on bankruptcies, credit defaults, and lower demand resulting from the mortgage crisis fallout.


4-Full-2008 Market CORRECTION or Market CRASH?


I spent the last several weeks adjusting and testing my trend model to account for this “fastest ever crash and bounce” that we all just witnessed.  The goal is to speed the trends up a bit for a portion of a couple of my model portfolios.


As for the long-term trend, however, while it had been negative for quite some time, the indicators in my trend model flipped “slightly bullish” last Monday, but then flipped right back to negative again on Thursday.  So at least for now, signals are “mixed” at best, and we’re still heavily in a defensive mode while we determine whether what we’re seeing is going to be a mere “correction” (like the 2nd snapshot, above), or something worse.


The million-dollar question remains:


“Will the market chop sideways and head higher from here, ignoring the bankruptcies, business closures, defaults, any permanent unemployment that results from the ‘temporarily unemployed,’ the expiration of the PPP loan and temporary ‘boosted’ unemployment dollars that end in July?”


Time will tell…


I’ve said it before, and I’ll say it over and over till we get there… but there will be plenty of opportunities to participate in a healthy uptrend when it arrives.  But the market is guilty until proven innocent, and the weight of the evidence still suggests that we’re not quite out of the woods.


Till next time…


Categories: Adam Koos, CFP®, CMT®, Market Commentary

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