S&P 500 Hits Critical Level Defining If Bear Market Has Started

Is the longest bull market in history officially over?

One month ago, when the market's recent rout was still perceived by many as a textbook correction and an opportunity to "buy the dip" instead of a signal that the economy is turning late cycle - and is a sufficient condition for the Fed to pause its rate hikes - we first asked the question whether this was an ordinary, garden variety 10% correction in a rising bull market, or is this the start of a bear market? 

As we showed at the time, the answer could be found - at least superficially - in the following Goldman chart, which showed the average trajectory of the MSCI World from a year before the start of a drawdown, through the actual drawdown and subsequent 10% drop, and then follows the two average paths: one of recovery, and the other of sliding into a bear market.

What the chart showed is that following the start of the MSCI World drawdown and through early November, global stocks were tracking the trajectory of the average bear market almost to the tick, however it was still too early to categorically distinguish whether what comes next is a bear market or the end of the correction.

Fast forward to today, when Bloomberg's Ye Xie picks up on this divergence only instead of looking at the MSCI World index, focuses on the S&P500 which - as in the chart above - has reached a critical junction to determine whether this is just another typical correction during this bull market or it is the beginning of a bear market.

And, like in the chart above, what until recently gave some confidence that the S&P was following an ordinary correction path, the S&P 500's performance since the Sept. 20 drawdown start has ominously started to diverge from the average path of the previous five corrections in 2010, 2011, 2012, 2015 and earlier this year, suggesting that absent a sharp rebound, a bear market may indeed be in store.

To be sure, there is still some leeway considering that the worst peak-to-trough drop of the past 4 corrections was a 19% slump during a five-month period starting in April 2011 when the European debt crisis roiled global markets (even if the other 3 corrections had rebounded much sooner and faster). In comparison, the S&P has sunk 13% over the past three months through yesterday, so a definitive answer may still take a few more weeks if the S&P finds a new range in which to trade. .

That said, as Bloomberg concludes unless today's rally - and whatever it is that Powell says tomorrow - sends the market back to its well-worn path after its recent correctively bearish detour, "it will smell more and more like a bear market."