How low can this market go? (Daily 2-Min S&P 500 Commentary by Sidney Shauy)

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How much lower can the stock market still go given past experience? One way to answer this question is to look at historical drawdowns. What’s a drawdown? Drawdowns are measured as the price differential in percentage terms from peak to trough. The S&P 500 closed Friday at 3,693 points. That’s roughly a 24% drawdown. To calculate, just take the latest lowest trough at 3.693 and divide by the most recent highest peak (Jan 3rd closing price of 4,796 points), then subtract it from 1. What’s a typical drawdown of the stock market during recessions?

In the post image chart created by Goldman Sachs and posted by Isabelnet, they complied the last 12 recessions since the post-war. Although each recession is different and so is the market decline, the average drawdown is 30% and the median is 24%. In the 1973 and 2001 recessions, the market lost about 50% and in the 2008 bear market, the drawdown reached almost 60%.

How about today? We already pretty much reached the median. Just to be in the historical average, there’s another 500 points to decline. That would be about 3,150 points (34% drawdown). Possible? Certainly. But there will be many moving parts. No two recessions and bear markets are alike. Bear markets cause so much suffering that it feels like we’ve been here long enough, but historically speaking, the current bear market hasn’t even reached historical average yet.

The Pulse in the yellow zone and hasn’t changed much. In anticipation for a possible relief rally, we increased our risk positions a bit but cautiously. We are holding 1/2 in risk positions for Levels I, II, II+, and III. This means 1/2 at risk and 1/2 in CASH.

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