Before I start, let's be clear that this is a VERY pessimistic view of what could happen, and chances are this situation may not occur. However, while this may have a low probability, investors should err on the side of caution in bear markets.
Technical Analysis
Let's begin with the monthly charts. Highlighted are the Elliot waves as well as a Fibonacci retrace. Analysis from the Elliot waves suggests that the S&P just completed its fifth main wave. Judging by both the RSI and the Stoch RSI, the S&P appears significantly oversold. If the Elliot waves displayed are correct, then based on the Fibonacci lines, a complete correction would take the S&P down to roughly $1163, a 61.8% retrace. The duration of the correction would likely take several years to complete.
Fundamental Analysis
As many of you might be aware, the credit cycle is reversing. Credit is being squeezed and interest rates are increasing. Considering that lowering interest rate through open market operations is one of the Fed's key ways of stimulating the economy, reversing the credit cycle would reset the Fed's ability to help the economy recover. As interest rates rise, cash flows are discounted at a higher rate, and thus present value of cash flows would decrease, resulting in lower prices. As prices fall, margin calls will get activated, and the loss of liquidity in the market will continue to send prices lower. As margin investors take on losses, default rates start to spike and this domino effect turns into a larger recession.
Again, this is absolutely not a certainty. However, investors should reevaluate the risk of their portfolios in the event that the present bear market expands into a larger recession.
Technical Analysis
Let's begin with the monthly charts. Highlighted are the Elliot waves as well as a Fibonacci retrace. Analysis from the Elliot waves suggests that the S&P just completed its fifth main wave. Judging by both the RSI and the Stoch RSI, the S&P appears significantly oversold. If the Elliot waves displayed are correct, then based on the Fibonacci lines, a complete correction would take the S&P down to roughly $1163, a 61.8% retrace. The duration of the correction would likely take several years to complete.
Fundamental Analysis
As many of you might be aware, the credit cycle is reversing. Credit is being squeezed and interest rates are increasing. Considering that lowering interest rate through open market operations is one of the Fed's key ways of stimulating the economy, reversing the credit cycle would reset the Fed's ability to help the economy recover. As interest rates rise, cash flows are discounted at a higher rate, and thus present value of cash flows would decrease, resulting in lower prices. As prices fall, margin calls will get activated, and the loss of liquidity in the market will continue to send prices lower. As margin investors take on losses, default rates start to spike and this domino effect turns into a larger recession.
Again, this is absolutely not a certainty. However, investors should reevaluate the risk of their portfolios in the event that the present bear market expands into a larger recession.
Here is 6M view of the same chart. It may be more clear.