The recent stock market sell-off which brought U.S. small cap stocks down 30 pct in less than 3 months can easily qualify as the stock market crash of 2018. The million dollar question of course is whether this sets the stage for a stock market crash in 2019. In other words, is thie end of just the beginning? Our leading indicator suggests that the crash should be stabilizing at current levels, so the worst is over, this is why.
As per our global market crash 2019 article which featured 5 leading indicators we said there is not sufficient evidence that the recent sell-off will unfold in a 2009-alike disaster scenario.
Arguably, a decline of 30 pct in 3 months in the U.S. small cap index Russell 2000 is already a small disaster. But we are not far from levels seen at the start of this year, and the decline came after hitting all-time highs, so this is not that bad (yet) provided the sell-off stops at current levels.
As said U.S. small cap stocks have a track record of signaling major tops and bottoms. Note, for instance, how the 2009 bottom came in right at the 2002 lows, so it was a great leading indicator.
Two weeks ago we wrote this: “The U.S. small cap index has some 10 pct downside. We expect the 2014-2015 highs to provide sufficient support.”
The chart below is the one we used, at a time the Russell 2000 index was trading at 1410 points.
As expected the horizontal support provided stopping power. We believe the sell-off is stabilizing around current levels!
What about the other leading indicators outlined in our global market crash article?
- The Euro looks good. It has stabilized around the median line which is a great sign.
- 20 year Treasuries are rising.
- 10 year rates are falling but current levels look to have solid support.
- The DAX is weak but close to mega support levels.
In other words we see a mixed picture in the broader market landscape which is not all that concerning at this point. Again, Russell 2000 is a leading indicator, and if this horizontal support holds strong, which we expect, we will know that the worst is over!
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