This chart is pretty self explanatory and after some review it seems quite satiating. It puts this past week into proper historical perspective and shows that no, the world isn't coming to an end. In fact, so far it looks quite normal in a regression to the mean model. As you can see, all markets are constantly trying to find equilibrium and when one side or the other wanders too far away from the median there is a very strong tendency to revert. Nowhere is this more evident than the 2000 megabubble where valuations reached a peak of 50% above the regression line that was extrapolated forward prior to the meteoric rise.
Where are we now in comparison? 13% above the regression line. Nowhere near 50%. So should we expect a correction? Of course we should - we're 13% above homeostasis. With that being said, 9% of that has already been chewed through after the past couple weeks of 2022. That leaves us 4-6% above where current equilibrium *should* be reached between the bulls and the bears. Does that mean it'll stop there? Of course not! So it's a reasonable assumption that it could travel down to the bottom of the channel... which is around 12% lower.
As you can see, it can and will travel below that line.... but more often than not it halts the descent somewhere close to it as the bulls start to equalize the selling pressure.
Only 4% more to go down sounds pretty good right about now. Even another 12% further down sounds manageable and would be no reason for "crash of the century" calls. It's a correction. These happen. It'll present a wonderful buying opportunity once it's done. Again, can it go lower? Yes. Much lower? Perhaps. They are outliers though, not the norm. Plan accordingly.
Where are we now in comparison? 13% above the regression line. Nowhere near 50%. So should we expect a correction? Of course we should - we're 13% above homeostasis. With that being said, 9% of that has already been chewed through after the past couple weeks of 2022. That leaves us 4-6% above where current equilibrium *should* be reached between the bulls and the bears. Does that mean it'll stop there? Of course not! So it's a reasonable assumption that it could travel down to the bottom of the channel... which is around 12% lower.
As you can see, it can and will travel below that line.... but more often than not it halts the descent somewhere close to it as the bulls start to equalize the selling pressure.
Only 4% more to go down sounds pretty good right about now. Even another 12% further down sounds manageable and would be no reason for "crash of the century" calls. It's a correction. These happen. It'll present a wonderful buying opportunity once it's done. Again, can it go lower? Yes. Much lower? Perhaps. They are outliers though, not the norm. Plan accordingly.