I don't see a 2001 type decline in the cards. The equities environment is just not as overbought as it was in 2001, so I am using 1990 as a "reality check" model (among others) to gauge where the market may go.
Using the 1990 model, if we believe that a bottom was reached last week, then past experience tells us that the bottom will be re-tested shortly.
From peak to trough, the 1990 model sold off about the same as the current time frame (about 20%). They also set a low around an established area of support (a range from 1275 to 1250 put in during 2006 for the current scenario). After the final bottom in 1990, the market traded in a range (after a snap back rally) for 5 trading days in early October before the re-test took place.
If we are trying to apply the 1990 model, this means a re-test starts this week.
When combined with a Fed Meeting and Announcement on Thursday and the fact that the market expects another 50 basis points, the set up for a big re-test is very possible. I personally think the Fed will disappoint the Street and that 50 more basis points is not in the cards - the Fed has never done that and the economic conditions are not as dire as pundits claim. Some will claim that the cut is for the credit markets to heal and not the economy, but LIBOR doesn't bring that case out anymore. Time heals that wound and not monetary policy.
This is a stretch. Almost a conspiracy theory. Regardless, I re-added some SPY Put protection this morning just after open.
Stay safe.
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