Last week, by Wednesday's market close, the S&P 500 triggered all three correction criteria. Price closed below the short-term trend, breadth turned negative, and momentum continued its decline. The week wrapped up with the S&P 500 closing down 1.56%, marking the largest weekly decline since last October's bottom.
For almost the entirety of this year, this weekly note has actively monitored the three correction, serving as an analysis to gauge the likelihood of a market correction being the next probable move. With these criteria effectively met, I am positioning for the market to progress through a 7 - 12% corrective move.
The analysis specific to the index transitions to assessing the potential severity of the a decline. That discussion will begin in today’s note, along with chart updates to the three category trade ideas: US Small Cap Equities, Outside of US Equities, and The Gold Trade.
All Correction Criteria Active
The three correction criteria:
Price trades below the short duration moving average (20 day exponential)— signifying the loss of the short term uptrend
Breadth turns negative— more stocks make new lows versus new highs
A concluding momentum interruption
Last week marked a significant event—the first time since July 2023 that all three correction criteria have been activated. The S&P 500 broke its uptrend by closing below the short-term moving average, market breadth, measured by Net New Highs, turned negative, indicating more stocks made new lows than new highs, and momentum continues to fall apart.
These three correction criteria have historically preceded meaningful market declines. (See the chart from the opening March letter “When Will the Market Top?”)
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Moderate or Severe Correction, Bearish Crossover
The following index analysis aims to focus on a moderate time frame of 3 to 8 weeks to assess the potential magnitude of the speculated decline.