This bear market for stocks is just a step away from becoming a monster

The Bloomberg Barclays US bond index lost more than 7% in one week.

The New York Stock Exchange suffered its most intense cluster of 90% down days (where 90% or more of the stocks listed on NYSE closed down for the day).

The S&P 500 (cash and futures) hit the breaker and triggered a trading halt four times.

Toilet paper is worth more than a Kardashian autograph.

Other notable mentions:

The S&P 500 gained or lost more than 4% every day of the week (for the first time since 1929).

Some 75% of the stocks listed on the New York Stock Exchange fell to their 52-week low (the second highest ever).

The VIX
VIX,
+ 35.29%

reaches the third highest level ever.

Potential disaster

Let me illustrate why all of these early evers could be potentially catastrophic:

Europeans have been chronicling high water floods for centuries. For example, the image below shows the flood levels of a river by Heidelberg, Germany. The largest flood occurred in 1784.

Examining the different high tides gives residents a range of what to expect (i.e., if you want to assess the magnitude of the risk of flooding for a house by the river).

What happens if, at the start of the rainy season, the water level exceeds the high water line of 1789 (blue line)?

Statistically, the risk of further flooding is low, as the water level has only increased twice in 250 years. But, based on the data available at the time, this may be one of those years where statistics (and historical performance) are unimportant.

Investors keep similar water levels. There is the Great Depression of 1929, the crash of 1987, the technological crash of 2000 and the financial crash of 2008.

The collapse of 2020 has already won a place in the middle of these high waters. In fact, based on the above selection of early evers, it's already in a separate league.

Record sales pressure

The chart below plots the S&P 500 during the worst of the 2008 downside crisis compared to the February 19, 2020 peak. The blue columns reflect the percentage of declining stocks traded on the NYSE for each day. In 2008, there were three separate 90% clusters of falling days (where 90% or more of the stocks traded on the NYSE ended the falling day, the red arrows).

The period from September 2008 to March 2009 hosted a total of nine days of 90% downtime. Each group of three days off (red box) caused a major rally.

The past three weeks have already delivered five days of 90% shutdown. By historical standards, sales should be (as good as) sold out, with no seller to drive prices down.

Risk-reward heat map

In December 2019, I started to compile a risk / reward heat map based on the reaction of the S&P 500 to certain events and conditions in the past.

The objective was to assess the risk caused by the unusual stock market rebound. (Yes, only a month ago, inventory increased.)

The risk / reward heat map below was published in the radar report of January 15, 2020 with the following warning: Based on our risk / reward heat map, we are approaching a period of pressure, of resistance over time so to speak, of a period of increased risk.

The latest risk / reward heat map captures forecast performance data for nearly 200 studies, and the forecast forecast return on studies triggered by this sale is positive 80% to 90% of the time.

However, there is a problem: it has become difficult to find real precedents for this merger.

The statistical probabilities of a merger similar to that of 2008 (or worse) are low, but telltale signs warn that this time may be different from the corrections of garden varieties observed in the past decade.

If we were to expect a bear to turn into a monster, it would likely provide readings similar to what we have seen.

Line in the sand

Although aware of the risk, I am not yet ready to subscribe to it. Sustained trading below the green S&P 500 trend line (around 2,485 points) and the trough of December 2018, however, would increase the chances of a monster market.

The corresponding trend line for the Dow Jones Industrial Average is around 20,850. No such line can be drawn for the Nasdaq Composite or Invesco QQQ Trust
QQQ,
-7.66%.
The Russell 2000 Index
RUT,
-11.70%

is already trading below its corresponding trend line (at 1,295, now resistance).

More detailed S&P 500 analysis and forecast available here.

Simon Maierhofer is the founder of iSPYETF and editor of the Profit Radar Report.