Many people have commented about the stock market run of the last few years, its widely perceived “Quantitative Easing” connection, and much more. Some of these people are smarter and more knowledgeable than me when it comes to economics but then again, sometimes the stock market does not react to economics, intuitive correlations, or “brains” but does what it wants to do…..
If you were one of the bulls who bought any significant correction in the past 5-6 years you would have done well, as QE just fueled the stock market into new highs.
To me the big question is: Does this represent the highs for the next few years?
Statistically the right answer is no. There is a higher probability that stocks will recover and make new highs than the chance that this may be the high for the next few months/few years.
However, in my opinion, there is a much larger room for profits on the downside than there is going long at these levels, especially considering that the FED is unwinding QE.
The safe bet would be to go with statistics and look for stocks to recover and make new highs; I am choosing the other route. I think the day Alibaba came out with one of the most hyped IPO’s in history was the day that marked the top of the stock market for the next few months at least and that we have more room to correct to the down side.
How much is the next logical question? To try and predict I have to go all the way back to July 2011!! That was the last time we had a significant penetration of the 200 days moving average. The 200 day MA is marked with the blue line inside the chart.
See the chart below from June -Nov of 2011. I measured the high point of 1265 to low point of 963. This was the last MAJOR correction I see on the SP500.
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If anything even close to this will happen this time, then here are some of the next targets to look for:
Regardless if I am right or wrong, one thing is obvious at this point, volatility has really picked up!
This may make the weekly SP options of interest to some of you. These short term expiration options offer some interesting opportunities and risks to explore.
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About Ilan Levy-Mayer
Ilan Levy-Mayer has been a commodities broker for over 15 years, and holds an MBA in Finance and Marketing from Hebrew University in Jerusalem. Ilan is currently the Vice President and a Senior Broker at Cannon Trading Company.
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