Apparently, the US is spending beyond its means...
But what else is new?
In the Q2 update, I included a bonus chart for the S&P. If you saw it, you knew the market was on an upward trend. It has increased by 12% since then. You’d also know we’re in a topping window right now. The news today also raises an important point to expand on.
Side note, I guess I listen to K-Pop now…
Well, the market certainly knows how to keep us on our toes. As I noted regarding the Q2 analysis, the S&P 500 recently entered a “topping window." I woke up to the news that Moody's has downgraded the U.S. credit rating from Aaa to Aa1. This isn't just a minor headline; it's a development that historically has shaken the markets.
Context and Conflict
First, let's put this into perspective. A credit downgrade essentially means a major rating agency perceives an increased risk in a country's ability to meet its debt obligations. This can influence investor confidence and borrowing costs. While concerning, it's important to note this isn't uncharted territory for the U.S. We saw similar downgrades:
August 5, 2011: Standard & Poor's (S&P) downgraded the U.S. from AAA to AA+.
August 1, 2023: Fitch Ratings followed suit, moving from AAA to AA+.
So, what happened to the S&P 500 after those events?
Following the 2011 S&P downgrade, the market declined approximately 10.39% over the subsequent 60 days (from August 5 to October 4, 2011), eventually carving out a significant low that wasn't revisited.
Following the 2023 Fitch downgrade, we observed a similar pattern: a decline of approximately 10.33% over 87 days (from August 1 to October 27, 2023), which again established an important bottom before the most recent current epic 46% run.
It's easy to look at these figures and immediately anchor to a roughly 10% decline as an expectation. But (and this is a crucial "but" for any trader), we must be cautious about bias. While history provides valuable context, it doesn't offer a crystal ball. Each market environment has its unique nuances.
How does this news align with my existing analysis? In the Q2 post, the chart shows the S&P is entering a topping window, a period during which the probability of a local peak increases. This was based on my cycle analysis and observed metrics, prior to Moody's news breaking. It’s a stark reminder that forecasting focuses on identifying when conditions are ripe for a turn, often irrespective of the specific news catalyst that might accompany it. The market usually seems to find a narrative that fits the predetermined timing.
While the news is significant and fits the timing window, a few pieces of our typical reversal puzzle aren't firmly in place yet for a precipitous drop:
Retail Sentiment: I haven't observed "extreme greed" in retail sentiment. Often, major tops are accompanied by widespread euphoria, which acts as fuel for a sharper reversal. The current sentiment is high, but not yet extreme.
Intraday Bearish Signals: While some minor bearish signals have flickered on the intraday charts, we haven't seen the kind of confirmation that would indicate the start of a decline of the magnitude seen in 2011 or 2023. Targets now don’t go beyond -2% (lowest around $2830).
The "How" of Forecasting: It's About Probabilities, Not Prophecies
This situation perfectly illustrates a core principle of my analytical approach. I don't predict specific news events. Instead, my work focuses on identifying periods – "timing windows" – where the cyclical frequencies and relevant market metrics suggest a higher probability of a turning point. The news or reason that surfaces around these windows is often secondary; the underlying conditions were already in development.
Think of it like this: an experienced meteorologist can identify when atmospheric conditions are conducive to a major storm. They can't predict the exact lightning strike at the beginning of the storm, but they can warn that the environment is primed. Similarly, my analysis showed the market was entering a vulnerable period. This downgrade, although impactful, serves as a catalyst that occurs within the pre-identified window.
It's also a time to be wary of confirmation bias. Whether you were leaning bullish or bearish before this announcement, it's natural to seek information that confirms your existing view. As traders, our job is to remain objective, weigh the evidence, and stick to our signals.
Potential Short-Term Scenarios: What to Watch For
Given this backdrop, what might we expect in the coming week?
Initial Reaction: It’s reasonable to expect the market to have a little freak out. With sentiment not marking perfect confluence for reversal it's possible the market won't have an immediate, severe knee-jerk reaction downwards and go in a different direction.
The "Relief Rally" Trap?: We could even see an attempt to push prices higher early in the week. This might lead some to breathe a sigh of relief, thinking the danger has passed. This is a classic pattern where final buyers are lured in before a more significant reversing move.
The Turn: Following such a “false” upwards move, or perhaps even without it, we would be watching very closely for intraday bearish signals to strengthen. If they do, this could usher in a period of price a decline (but at least consolidation), potentially heading into a mid-June bottoming window I've previously identified.
Stay Alert, Not Alarmed
This U.S. credit downgrade by Moody's is undoubtedly a major development, and it arrives precisely within a timeframe my analysis had already highlighted as a potential topping window. You've seen how my previous forecast for a rally from the April 8th lows (which saw the market climb 19.58%) played out; this was also based on identifying such timing windows.
This doesn't automatically mean a -10% drop is guaranteed or imminent.
Discipline is Key: Now, more than ever, stick to your trading plan and robust risk management.
Watch the Signals: I’ll be scrutinizing intraday price action for those crucial bearish confirmations. The current lack of extreme sentiment and the absence, so far, of overwhelming sell signals suggest a cautious stance, rather than immediate alarm about a severe plunge.
News as a Vehicle: Remember, the market often uses news events to facilitate moves it was already technically poised to make. The "why" can be fascinating, but the "when" and "what the charts say" are paramount.
Stay tuned, remain objective, and let the market action guide your decisions not the news.
@ThePrivacySmurf