By Simon Maierhofer
JORGE GUERRERO/AFP/Getty Images
Congratulations us! We are seeing history being made. For the first time ever, the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.30% crashed more than 12% the week after an all-time high.
Formerly red-hot mega cap stocks like Apple /zigman2/quotes/202934861/composite AAPL +1.03% , Amazon /zigman2/quotes/210331248/composite AMZN +0.66% , Microsoft /zigman2/quotes/207732364/composite MSFT +1.30% , Alphabet /zigman2/quotes/205453964/composite GOOG +0.92% Tesla /zigman2/quotes/203558040/composite TSLA +1.95% , etc. are taking major indexes like the S&P 500, Dow Jones /zigman2/quotes/210598065/realtime DJIA +0.20% and Nasdaq /zigman2/quotes/210598365/realtime COMP +0.37% down.
Does this mean the great bull market is over?
To get the best possible read, I’m looking at two components:
1. The level of calm, optimism and momentum leading up to the February high
2. The level of pessimism created by this week’s meltdown
Momentum and optimism — climbing up the stairs
My Jan. 18 MarketWatch article titled “Bullish stock market investors will soon be their own worst enemy” featured the chart below (price updated) and warned that: “Over the next one to four months, all the gains accrued from today on are very likely to be erased.”
One reason for this bearish forecast was the pervasive complacency and lack of volatility. Until Jan.y 27, the S&P 500 had gone 70 days (yellow boxes) without a move of more than 1%.
The yellow arrows highlight what happened after similar periods of calm: Crash.
Volatility has now reached a level that sparked rallies in the past.
The December/January/February rally set numerous momentum (bullish for stocks) and sentiment (bearish for stocks) records. In fact, it turned into an epic tug-of-war between momentum and sentiment. Why?
An analysis of prior momentum markets reveals that momentum doesn’t die easily and leads to long-term gains a vast majority of the time (with some weakness short-term).
An analysis of prior sentiment extremes reveals that excessive optimism almost always leads to nasty losses over the next one to three months.