Slippery Slope

The recent bear market rally may have failed right at the 200-day moving average and now appears to be rolling back over again.

Many analysts are pointing to a similar situation in 2008 where the market failed to break above the 200-day moving average and then proceeded to drop over 50%. This is of course an analog, which means it's probably wrong. Anecdotally, even the best analog predictors are right less than 10% of the time.

That being said, we agree that the market should continue to slide, just not to the same extent as it did in 2008 in the immediate future. Now that we've broken below the June 1st highs at 4170, the market could fall to the 50-day moving average around 4000. If the market breaks that level, we would expect some retest of the late June lows at around 3670, and if it doesn’t hold, the 3400 level is well within reach.

Given that the market closed at 4228 last Friday, a move down to 3400 would represent a 20% drop, which is far from good, but far better than than the 2008 analogue everyone is currently crying about.

Keep an eye on the bond market here as well. From mid-June until the end of August, bonds rallied due to the perceived end of fed tightening and a peak in inflation. If they resume their upward momentum while stocks continue to drop, this could be a sign of a?safe haven trade, and therefore a confirmation of the coming stock weakness.

Pave's technology is closely monitoring volatility factors as well as the?VIX, which is the most widely used volatility index, for any sustained spikes. Currently, we have not yet seen a spike in?tail risk, but if we do, that would be further confirmation that value focused portfolios are best positioned to minimize losses in a falling market.

Best,

Pave Team