Late-Summer Reassessment

As it has now been several weeks since the August 9th low in the US equity markets, it is appropriate to take stock and reassess. Our determination that the market would rally for days or weeks off of the August 9th low turned out to be a good one, as the market remains over 8% higher. The NASDAQ100 did test its August 9th low on August 19th, but it never went below and has rallied quite strongly five of the past six days since then. So the crash is over and the market has spent the past few weeks chopping up and down in very high volatility, trying to find a level of value.

While it is heartening that buyers have returned and halted the early-August cascade down, the major indices have, nonetheless, entered into a long-term downtrend. While this new long-term downtrend can only be ‘confirmed’ upon the market breaching the August 9th lows, the general mode hereafter will likely be rallies that fail after a few weeks to a month or two, then lower lows. Strong rallies like the one(s) we have seen since the August 9th lows are typical of bear markets, as they indicate instability. Sustainable rallies are associated with declining volatility as well as intermediate-term moving averages pointing up, neither of which has occurred the past few weeks.

So far, the two scenarios we believed were most likely in our last post are both still in play, while the two outliers have, indeed, failed to materialize. From this point in time and price, the market may or may not continue going higher before testing the August 9th lows. The choppy rally higher is perhaps the more likely continuation for the short term. Regardless, the further in time we progress without a test of the August 9th lows, the greater the likelihood that, when tested, it will fail.