One Bank Calculates The Odds Of A Market Correction In The Next 3 Months

Yesterday was a historic day for the S&P 500: not only did the index close at a new record high, but it was also 269% higher than its "generational lows" of March 2009, surpassing the 266% increase during the 1949 to 1956 bull market, according to Bloomberg calculations.

And while there is no reason to doubt that central bankers - who no longer have anything to lose from blowing the biggest, hopefully last bubble in history - can push this artificial "market" to unprecedented levels, even taking out the top spot of the 1990-2000 market run which saw the S&P rise by over 400%, others are less sanguine, and in recent weeks calls for an imminent correction have become a chorus. After all, it has now been years since there was even a modest drop in the S&P500, resulting in an generation of traders who are unfamiliar with using the sell button (for those asking, one definition of correction vs a crash is that the former follow rich valuations, but only crashes are associated with recessions).

That said, any correction forecast needs two components: When and Why?

Conveniently, Citi has released an analysis looking at these two variables, and notes that while many economic indicators are poor "predictors" of corrections, there are a handful of reliable signals to keep an eye on. Starting with the "why", the bank writes that there are two things the precede most corrections: i) toppish valuations & waning earnings growth - especially as they impact credit-  of which both are amply present currently...


... and more importantly, ii) when central banks pull the plug, as there have been few corrections without preceding hikes.


As a reminder, central banks are pulling the plug as we speak.

So putting this into the bank's prop model that calculates the odds of a correction, no really...


... Citi finds that odds of a correction in the next 3 months have now risen to more than 45%.


Finally, the bank "helpfully" points out that most correction are associated with a trigger... only in hindsight. Luckily, in retrospect there will have been plenty.


Finally, for those who would rather avoid trigger events and prefer to go with their gut, then just look for irrational exuberance. In a market with over $20 trillion in central bank excess liquidity, it should't be  difficult to find.

Comments

small axe Thu, 09/14/2017 - 13:56 Permalink

The energy wasted spent trying to fit the square peg of central bank manipulation into the round hole of "free market" analysis could have rebuilt the real American economy ten times over.

shizzledizzle Thu, 09/14/2017 - 14:14 Permalink

It's going to be crash or to the moon... Betting on the later. They can't even entertain the idea of letting a correction start to happen because it will reach terminal velocity before they can pull the plug.

mjcarr51 (not verified) Thu, 09/14/2017 - 14:25 Permalink

Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha .   

Jtrillian Thu, 09/14/2017 - 14:31 Permalink

First of all, the banks are corrupt and cannot be trusted.  You'd be better off listening to Garman.  Second of all, we are at the point where the markets cannot correct without crashing.  See SYSTEMIC RISK.