I have kept an open mind over the past few months as to whether the July-September decline in US equities was the first leg of a new cyclical bear market or a correction within an on-going cyclical bull market. There were hints that it was the former, but there was nothing definitive in the indicators I follow and the price action was consistent with either possibility. The jury is still out, although there has been a probability shift over the past couple of weeks. Before I discuss this shift I’ll do a quick recap for the benefit of blog readers who aren’t TSI subscribers.

During the first half of July this year I thought that there was almost no chance of the US stock market experiencing a bona fide crash over the ensuing few months, but — for reasons outlined in TSI commentaries at the time — I thought there was a good chance of the S&P500 Index (SPX) falling by 10%-20% from a July peak to a bottom by mid-October and that a put-option position was a reasonable way to trade this likely outcome. Then, when there was a discontinuity at the start of the US trading session on Monday 24th August with prices gapping sharply lower across the board, I sent an email to TSI subscribers saying that all bearish positions should be exited immediately. My view was that the 24th August mini-panic would be followed by a multi-week rebound and then a decline to test the low by mid-October, but regardless of what the future held in store the 24th August price action created a very obvious profit-taking opportunity for anyone who was betting on lower prices.

Subsequent price action could aptly be described as noncommittal. There was a successful test of the 24th August low in late-September followed by a strong rebound to a high in early-November, none of which was surprising. Also, this price action didn’t provide any important new clues, because I considered a successful test of the August low followed by a rebound to at least the 200-day MA to be likely regardless of whether we were dealing with a bull-market correction or the early stages of a new bear market.