What is the Worst Case Scenario? (9/22/2022 Pre-Market)

As shown on the chart below, the Dow Industrials is not that far away from its June low, and with the aggressiveness of the selling, I think it is time to seriously consider scenarios in which the June lows on the major indices fail.

If the June low of 29,653 fails, the worst-case scenario that I see would be a drop to 27,582 (representing a 50.0% Fibonacci retracement of the rally from March 2020 – January 2022.

For the S&P 500:

The worst-case scenario that I see is a drop to 3,504, representing a 50.0% retracement of the rally from March 2020 – January 2022. This would not be much below the June low of 3,636. I think there is good reason to expect that time spent below the June lows (if any) will be relatively short on the major indices, for reasons described later.

For the NASDAQ-100:

The worst-case scenario is a drop to 10,588, representing a 61.8% Fibonacci retracement of the rally from March 2020 – November 2021. As with the S&P, this does not represent a major break below the June low.

I still do not think that a break below the June lows is the most likely scenario. With the backdrop of an economy that is still experiencing strong employment growth (+315,000 jobs in August), and an S&P 500 that was down 25% from all-time highs as of the June low (enough historically to discount a mild recession), it makes sense to say that the current drop is merely an “Elliott Wave 2” pullback.

However, even if a break below the June low does occur, my reason for thinking it will be relatively short-lived comes from my Lindsay Basic Movements analysis on the Dow Transports (discussed more in the previous post).

Even though the Transports have broken below the previous correction low (July in this case), I still think that a basic advance began in July. Thus, I would expect additional downside to be relatively short in duration before a rally to all-time highs begins.

Lindsay on the Transports (9/8/2022)

The U.S. stock market has been in a pullback since mid-August, but toward the end of the week ending Sept 2, it looked like the market had an all-clear signal for a rally to new highs. There was a sharp intraday reversal to the upside on Thursday, Sept 1, followed by a rally on the morning of Friday, Sept 2 on the news that August was yet another strong month for job creation (net gain of +315,000 jobs). But then Putin cut off the gas supply to Europe, and U.S. stocks started tumbling again.

I decided that I needed to reassess how well-grounded my bullish outlook is, so I decided to do the Lindsay Basic Movement analysis on the Dow Transports (DJ-20). The Transports is a less famous market index than the Dow Industrials, but it can sometimes be a strong bellwether for the broader U.S. stock market. The Transports is a collection of 20 large airline, rail, and trucking stocks.

The chart above shows Lindsay basic movements going back to the 2009 bear market low. A further discussion of Basic Movements theory can be found in my previous post. I think that the Transports had a very clear basic decline from Jan 2018 – Dec 2018. This decline came after a very clear basic advance from Jan 2016 – Jan 2018.

From the Dec 2018 low, I think a basic advance began and lasted until May 2021. The covid crash occurred in the middle of this advance, but I think we can still consider this period a basic advance and regard the crash as an aberration. I discuss this more in my previous post.

The Transports began a very pronounced pullback in May 2021, which is noteworthy because, by that time, it was nearing the maximal length for a basic advance (about 2.5 years). Even though the Transports shot up to a new high in Nov 2021, this was short-lived, and a long downtrend to July 2022 began thereafter.

The period of May 2021 – July 2022 is a very typical duration for a basic decline. Thus, the Transports’s activity from May 2021 onward further boosts my confidence that the U.S. stock market has begun an advance that should last until 2024, and news pertaining to current events is likely to only be of short-term significance. The economic ramifications of inflation and war were likely discounted by the market during mid-2021 through mid-2022.