Given the drop that we have witnessed during the last days of June 2020, many voices are claiming again that a 50% crash is coming, so I just went back to the chart in order to assess the probabilities of this event happening.
On the left side, you have the las ten years of the SP500. This multiyear bull market has been primarily driven by liquidity.
You can clearly see a perfect channel once you draw the trend lines that join the highs and lows over this period of time. The lowest lows are the bottom of the GFC 2008 and March 2020 (COVID-19), while there have been some bumps along the way (EU sovereign debt crisis, China, etc), all of these bumps haven't caused the sp500 to close lower than the mid range of the channel.
On the right you can see the superlong term chart of sp500 (from 1929 until today) to put in context where this 2008-2020 channel fits in the long term history of sp500. I've drawn two green lines (sp500 cheap in historical terms) and two red lines (sp500 expensive in historical terms).
You can observe the 2008 -2020 bullish market rises from the bottom of the long term historical channel (connecting 1929, 1974 and 2008 market bottoms) to the upper side of the channel.
Similarly the low of March 2020 can be connected with 1987, 1970 and 1953 market crashes.
Now if a market crash happened, that would mean going down to at least the bottom of the yellow market chaneel, or green market channel. What are the odds of this happening:
- Yellow channel (left side): the only two points that have touched the yellow line are the bottom of GFC 2008 and March 2020. Twelve years have passed between those to points, so in terms of probability it seems unlikely to test the chaneel just four months later than the last point. Even more, given that June is closing near the mid term line, now it would be a good moment to start accumulating.
- Green channel (right side): a 50% market crash would imply touching the lower green line, therefore, we have to search for historical data points in which the sp500 dropped from the thin green line to the thick green line. These data points are:
- October 1937 - December 1941.
- March 1970 to July 1974.
Both data points correspond to two different recessions:
1937: recession of 1937-1938. Market bottoms during WWII.
1974: OPEC crisis.
In both cases, the drop from the thin to the thick green lines occurred after 4 years, so this would be the first time that would happen in such a short time span.
I think the drop of March 2020 would have gone down to the thick line if the FED haven't acted in such a fast and aggresive way. Now, keep in mind that even with the money printer going brrrr the FED "only" managed to make the markets go up until the mid part of the yellow channel, so this is the law of diminishing returns, they have to estimulate more and more, just to achieve less and less. Buyers are in control and the only way of sustaining this market imo is through FED adding more stimulus or if a vaccine is announced.
On the left side, you have the las ten years of the SP500. This multiyear bull market has been primarily driven by liquidity.
You can clearly see a perfect channel once you draw the trend lines that join the highs and lows over this period of time. The lowest lows are the bottom of the GFC 2008 and March 2020 (COVID-19), while there have been some bumps along the way (EU sovereign debt crisis, China, etc), all of these bumps haven't caused the sp500 to close lower than the mid range of the channel.
On the right you can see the superlong term chart of sp500 (from 1929 until today) to put in context where this 2008-2020 channel fits in the long term history of sp500. I've drawn two green lines (sp500 cheap in historical terms) and two red lines (sp500 expensive in historical terms).
You can observe the 2008 -2020 bullish market rises from the bottom of the long term historical channel (connecting 1929, 1974 and 2008 market bottoms) to the upper side of the channel.
Similarly the low of March 2020 can be connected with 1987, 1970 and 1953 market crashes.
Now if a market crash happened, that would mean going down to at least the bottom of the yellow market chaneel, or green market channel. What are the odds of this happening:
- Yellow channel (left side): the only two points that have touched the yellow line are the bottom of GFC 2008 and March 2020. Twelve years have passed between those to points, so in terms of probability it seems unlikely to test the chaneel just four months later than the last point. Even more, given that June is closing near the mid term line, now it would be a good moment to start accumulating.
- Green channel (right side): a 50% market crash would imply touching the lower green line, therefore, we have to search for historical data points in which the sp500 dropped from the thin green line to the thick green line. These data points are:
- October 1937 - December 1941.
- March 1970 to July 1974.
Both data points correspond to two different recessions:
1937: recession of 1937-1938. Market bottoms during WWII.
1974: OPEC crisis.
In both cases, the drop from the thin to the thick green lines occurred after 4 years, so this would be the first time that would happen in such a short time span.
I think the drop of March 2020 would have gone down to the thick line if the FED haven't acted in such a fast and aggresive way. Now, keep in mind that even with the money printer going brrrr the FED "only" managed to make the markets go up until the mid part of the yellow channel, so this is the law of diminishing returns, they have to estimulate more and more, just to achieve less and less. Buyers are in control and the only way of sustaining this market imo is through FED adding more stimulus or if a vaccine is announced.