What happened last week.
What we're watching for next week.
What a day! And What a week! What's going on? The financial media blames the recent carnage on Trump's trade war with China and possibly Europe. They also blame the Fed for not cutting rates more aggressively. I have a different view.
I blame high market valuations and weak earnings growth. The headlines may have sparked this decline but it was overdue anyway.
Chart of the Week - Market Internals
This table is a snapshot of market internals for today, last Friday, and one week ago. We can see the selling pressure building and ultimately ending in a rare 10-to-1 down day, in terms of advance-decline issues and up-down volume.
These 10-1 days are so rare that market pundits, technicians and fundamentalists alike, sit up and take notice. A day like today doesn't guaranty that the bull market is dead, but it does send a strong message to bulls and policy makers that this is the real deal.
Above table is from WSJ.com.
Chart 2. Worst Single Day Market Drops
This table logs the worst days for the market since 1950. Today's nearly 3% decline comes in at number 107 out of 17,500 trading days in the data set.
That works out to a 0.6% likelihood that the market would get slammed this hard. A rare event, as I said, but not unprecedented.
Chart 3. S&P periodic returns.
The last 10 days, and especially today's market action, have moved the needle for our periodic return charts. The market has transitioned from a Goldilocks state to a worrisome one.
You can read the charts for yourself, but I'll highlight two items. The YTD gain has now dropped from 20.7% to 13.8%. That'll get your attention.
And perhaps the most worrisome of all is the Year-Over-Year change, which was as high as 26.6% at the peak of the Trump rally and is now struggling to remain above water.
Final Thoughts
Last week's drubbing was significant, but not necessarily a fatal blow to the 10-year bull market. The last time we saw a 3% one-day drop was December 24, 2018. That turned out to be a "flush" or capitulation event. It brought the market to the brink of bear territory, but the market rallied strongly the next day and didn't look back until 10 days ago.
This time around we are starting from new highs. The market is only down 6% from the last high - not even a proper correction. What happens next is anyone's guess but I'm comfortable with my 35% cash cushion for now.
If you want more info about how to set up a solid Plan B, see my articles on the subject here and here and here.
For a full analysis of the probability of a bear market or a new recession, check out my Monthly Intelligence Report.
As always, if you like what you see, or have suggestions for improving this recap, leave a comment below, or email me at info@zeninvestor.org