The US indices collapsed last week with highly extremely correction. The blue chip Dow Jones Industrial Average lost more than 1,000 points on Monday, which was the biggest daily decline in history. However, the indices did not stop there, the decline continued throughout the week, eventually correcting more than 10% of their values. Now the question everyone is asking is where the correction will go and how long it will last.
A few experts, including those who have so far urged everyone to buy, and that the US indices will continue upwards, however, now cannot predict where the decline will be. Decreases of a similar magnitude are observed relatively rarely, and they are largely related to mass psychology. At present, all investors are scared, and many of them sell assets in their wallet-based portfolios, not to make insurmountable losses.
Otherwise, officially the market is already in a correction phase. This is the phase at which the indices fall by more than 10%. And that’s a fact. Only in the last week, from the stock markets was erased market capitalization of over 2 trillion USD.
The experts from Goldman Sachs remind investors that the average historical correction lasts four months and is at the rate of 13%. The problems get worse if the adjustment turns into a “bear market”. This is the case when markets are down by more than 20%. In these cases, historically, the indices needed 22 months to reach their previous peaks and the average decrease was about 30%. In other words, to get seriously worried about investors, the broad US index S&P 500 has to drop below 2,300. That’s about 300 points from the levels at which it closed the index late last week.
Many analysts, however, are on the opinion that we will hardly see a correction of over 20%. There are no signs of a recession in the US economy, and crises are the only factors that bring the indices into bearish cycles.
The biggest concerns at the moment are the direction of the future policy of the Fed, as well as the high financial estimates. However, both problems may become irrelevant if the decline continues at a similar rate for some time now.
From a technical point of view, the S&P 500 index appears to be over-sold in the short term. Its record RSI from the end of last month is already in history. The indicator is extremely close to its 50-day SMA on a weekly basis, which is at 2,520 points.
Historically, at the peaks of 2000-2007 is observed the same pattern of behavior. A sharp and rapid adjustment of between 8 and 12% within four weeks, followed by three to four months of consolidation and a test at the top and only then the real bear market. If this scenario is repeated, we can see the end of the investment grief in two weeks. Naturally, we can hardly be expected during this period to continue to see a decrease in such a magnitude. Rather, we will see consolidation of the index.