Is a 29% Plunge Coming?

Stocks are in a bullish mood. In fact, the markets are up about 6.6% over the past month, and year to date, the broad-based measure of the domestic equity market, the S&P 500 index, is up some 24.6%. Yes, it’s another bull march for stocks, and that’s made intrepid investors a lot of money along the way (and that’s especially true for subscribers to my newsletter advisory services). 

Yet what if I told you that given this market’s fundamental and technical dynamics, there is a possibility of up to a 29% plunge off current levels?

Okay, now catch your breath for a moment and hear me out. First, I am NOT saying that a 29% plunge is imminent. Far from it. In fact, I see more upside in equities as we close out the year due to factors such as the Federal Reserve signaling what the market expects on its tapering plans (start that sigh of relief).

Still, if we do a little market multiple analysis and plot that analysis on a chart of the S&P 500, we do find that from a valuation standpoint this market has far less upside potential here than it does downside exposure, at least by historical valuation measures.

Let’s take a look at an excerpt from this morning’s edition of my daily market briefing, the “Eagle Eye Opener,” to see just what I mean. Here, we will look at the “current situation” with respect to the market multiple, the “better-if” scenario and what that means on the charts and then the dreaded “worse-if” scenario, which pegs that potential for a 20% plunge.

The Current Situation: The current situation improved in November with respect to the market multiple, with expected 2022 S&P 500 earnings rising from $220/share in October to $223/share this month and the multiple range increasing from 19.5X-20X in October to 20X-21X now. Those new figures provide us with an updated target range spanning from 4,460 to 4,683 with a midpoint level of 4,572.

Looking at the chart, the current situation is appropriately in line with where stocks ended October. Notably, there was some very light volatility around the midpoint at 4,572 in late October, which increases the technical significance of that level as more volume traded hands there and it should be viewed as a key initial support level on a lower time frame. Below there, the low end of the current situation at 4,460 corresponds with the upper portion of the broad pivot reversal out of the late-September/early October bout of volatility and should be viewed as a secondary support level near to medium term.

The Things Get Better If Scenario: After a slight deterioration in October, the better-if scenario rebounded back higher in November as the multiple increased from 20.5X to 21X, while 2022 earnings expectations for the S&P 500 held steady at $225/share. That provides a new better-if scenario target of 4,725, up from 4,613 in October.

On Friday, Nov. 5, the S&P 500 came within seven points of the new better-if target, but stocks have since turned sideways as the sprint higher in stocks realized over the last month is digested. In the near-term, we expect the better-if target of 4,725 to act as a modest resistance area unless there is a meaningfully positive catalyst that could send stocks to new record highs.

Since our last market multiple chart analysis, the S&P 500 finally hit the longstanding measured move target that we calculated using the extremes of the massive trading range of first-half 2020. That target was 4,596 and, interestingly, there was some noticeable profit taking at that level as the S&P edged past that mark by two points on Oct. 26, before dropping by nearly 50 points in the subsequent two sessions. It was not as substantial a resistance level as initially expected but the fact that there was hesitation by the market at 4,596 reiterates the importance of technicals on the broader stock market.

For the last few months, we have been running a regression line through this year’s price action and extending it through the end of December to help offer an additional upside target into year-end based on 2021 price action. The latest update provides us with a year-end target of 4,785 for the S&P 500, down modestly from last month’s target of 4,825. The lower revision reflects the loss of upside momentum during the September/October pullback. From where the S&P 500 began the week, that is less than a 2% move higher for the index.

The Things Get Worse If Scenario: After several months with no change, the worse-if scenario improved modestly in the November market-multiple update as 2022 S&P 500 earnings expectations increased by $5 to $215/share, with the multiple range unchanged at 17X-18X. Those figures provide a new target range of 3,655-3,870 with a midpoint of 3,763.

The upper half of the worse-if scenario range between 3,763 (midpoint) and 3,870 (upper bound) encompasses most of the moderately volatile trade that occurred in the first quarter of 2021 (think GME squeeze and the Archegos debacle), which adds technical significance to the area due to the high amount of volume that changed hands. Additionally, the midpoint of the worse-if range on the S&P 500 is within 10 points of where the index closed out 2020 and began 2021, another reason it would be psychologically important in the event we see a substantial surge in volatility between now and year-end. 

Yet from the latest all-time highs, a drop to the worse-if target zone would constitute a decline of between 21% (upper end) and 29% (lower end), which would mean the stock market giving back all the year-to-date gains.

Now again, I am not saying this is going to happen. I DO NOT think it will. Yet doing this kind of analysis, the sort you’ll find every trading day in the “Eagle Eye Opener,” is the kind of prudent lens by which to look at this market — or any market.

So, if you don’t want to be blindsided by the market’s valuation, by the real drivers of the market or the potential exogenous events that can threaten your money, you should consider subscribing to the “Eagle Eye Opener” today. Doing so will not only give you piece of mind, but it also will give you the confidence to act in defense of your own money so that you can maximize gains and minimize portfolio damage. 

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Put Work Into It 

You want a hot body? You want a Bugatti?
You want a Maserati? You better work, b**ch

— Britney Spears, “Work B**ch”  

It’s fashionable these days to criticize the Millennial generation for being “snowflakes” and for being “entitled” and “woke,” but my experience with the younger generation has been largely that they are go-getters intent on maximizing their lives. Maybe it’s because that’s the kind of people I surround myself with, but I tend to think that many of us Baby Boomers dismiss younger generations just because it’s not the way we did things. 

An example of this go-getter ethos can be found in the 2013 pop anthem, “Work B**ch,” by Britney Spears. Here, the singer reminds her fans that anything great in life must be worked for, and that if you want to live an exotic and exciting existence, you better put work into it. I love this sentiment, and I suspect you do, too. And as a side note, what other publication gives you edgy, pop star wisdom like this? 

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.