As I talked about last weekend there have only be "5"
times since 1900 when the following conditions have been met.
1. Dow or S&P Composite
dropped 10% in 5 Days or less.
2. Dow and S&P Composite were within 4 months of an "All Time
3. Shiller PE was 20 or above
4. The 20 Month Moving Average was tested.
Prior to the
most recent event these conditions were met in January of 2008, April of 2000,
August of 1998 and October of 1929. This month will be pivotal for the
S&P 500 depending on whether it closes a 2nd Month in a row below its 20
Month Moving Average or not.
Let's see what happened with the
prior "4" events and the 20 Month Moving Average. Starting with
the last event in late 2007/early 2008 there were "2" monthly closes
below the 20 Month MA in January and February of 2008. In this case the
S&P 500 rallied back to its 20 Month MA which was then followed by another
significant drop (points A to B).
The next case was in 2000 as the
S&P 500 closed below its 20 Month MA "2" months in a row in
November and December. Once again notice the S&P 500 rebounded
back to its 20 Month MA before selling off again (points C to D).
Meanwhile in the Fall of 1998 notice
the S&P 500 failed to close below its 20 Month MA in September and October
although it did briefly drop below it two months in a row (point E).
This was then followed by another significant rally through the Spring of 1999
(points E to F).
Finally the last event was in the
Fall of 1929 as the S&P closed below its 20 Month MA in October and
November. In this case the S&P rallied back to its 20 Month MA before
another sharp sell off occurred (points F to G).
Currently the 20 Month MA in the
S&P 500 is at 1999 sp this value won't change much over the next three
weeks. Thus this will be a key level to watch by the end of the month and
may have significant implications for the market in the future depending on
whether the S&P 500 closes above or below it.