Stock Market Correction | Podcast Episode #41

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Learn to trade stocks successfully. Learn to profit consistently. I’m Ryan Mallory, and on my weekly podcast, I’m going to teach you the ins and outs of a complex, ever-changing stock market. You will learn to trade better, trade smarter, and profit bigger.

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Now, let’s go trade. Hey, everybody. This is Ryan Mallory for shareplanner.com today for the Swing Trading the Stock Market podcast and for my YouTube channel on V-shaped bottoms versus U-shaped bottoms. And what are the, what’s the difference really? Well, it’s the shape of the bottom. It’s how, how does a market after a significant correction or pullback, how does it bottom out?

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Does it go straight back up or does it kind of base and then go back up? And For many, many decades, it was more of a U-shaped bottom where you would have a significant sell-off and price would settle in in a price range and kind of collect itself and based there for a long period of time, and then all of a sudden it would start steadily marching back higher to its all-time highs again.

1:07
In recent years, especially following the 2008 Great Recession, that hasn’t been the case. You’ve had many more V-shaped bottoms, and even when you do have like what looks like a U-shaped bottom, it’s really just a, a series of failed V-shaped bottom, uh, bounces or dead cat bounces is what we might call them.

1:25
So. What we have today is, is a lot of V-shaped bounces to where the market sells off and then immediately bounces right back up. And what’s the reason for this? Well, you have a lot more technology in play with the markets today. You have algorithms, you have massive amounts of hedge funds.

1:42
You have the electronic trading phenomenon that’s, you know, new to the market over the last 1520 years. So, It’s a different set of circumstances that’s affecting the market that are, that’s driving these V-shaped bottoms versus 20 years ago you didn’t have that. You, you were, you had people still on the floor trading primarily, and, and that’s almost like a, a lost art really, and it’s a shame, but that’s the case now.

2:05
Everything’s electronically driven. So let’s look at some, let’s look at some, um, breakouts or V-shaped bottoms from over the years and see how they have affected. Uh, the trading following a massive correction. So the first one’s going to be, we’re just gonna go straight back to 2008.

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I’m gonna pull up a two-day chart. And right there. So Martin, so you had the big correction, right? I mean, everybody knows about it. This huge correction, and it was very steady for a long time. It just kept going. It wasn’t really all that bad until, I mean, it was bad, but it wasn’t crazy bad until that final quarter of 2008 and into 2009 where it just lost its marbles, so.

2:46
Yeah, October 2008 and then again in February of 2009, and then it finally bottomed in March of 2009. And what’s crazy is it bottomed at 666. That was the low point for the S&P 500, kind of weird, but, uh, nonetheless, you didn’t have this basing pattern.

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You actually had some basing patterns along the way, but it was really just pauses in the correction. But when it finally did reach the bottom, it didn’t base at all. It went straight back up. I mean, look at this. One of the worst sell-offs ever, all of a sudden bounces like it never happened. So there was euphoria.

3:22
There was people wanting to buy it all of a sudden, and so. You look at what it’s done over the years. I mean, look at this. It’s just gone right back up and I’m giving you like the fast forward version here. And yes, there’s been corrections along the way and we’re gonna talk about those some, but, uh, nonetheless, they’ve all been V-shaped for the most part.

3:40
So let’s, let’s look at some examples um from October 2014. We gotta fast forward this thing. Here we go. Massive sell-off and the circumstances behind it for this, for this video, it really doesn’t matter. I’m not really trying to get into the explanation for the sell-off.

3:57
I’m just getting into the fact that it sold off and what was the response to it, so. Let me pull it back up here cause I just switched over to a one day chart. So yeah, we, we pull off, we go from 2000 all the way down to 1823 or so, and that’s about an 18% correction within about 1.5 months.

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Pretty significant there. OK? And then it just puts in a bottom one day and it shoots back up and it, it exceeds where the market was at prior to that extreme correction. So then, you fast forward to August 2015.

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And again. A significant, significant sell-off here which saw two attempts to bounce. Now you can say, well, that’s a U-shaped bottom because look, it’s got the curvature, you know, it’s, it’s a, it’s a rounded bottom for the most part, but it’s, it’s really what it is.

4:49
It’s, it’s a failed V-shaped bounce attempt or a dead cat bounce, and why they call it a dead cat bounce is because the market sometimes. It can sell off really hard and it’ll bounce and you can think, OK, the, the worst is behind us, but really all it is, is, uh, it’s a lifeless bounce that doesn’t really have any, uh, sustaining momentum to it.

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And like a dead cat, if you throw a dead cat off of a, a building, as graphic as it sounds, it’s going to bounce, OK, but it doesn’t mean it has life in it. And that’s what you have here with this bounce attempt here. It’s a failed bounce attempt, and it comes back down and tests those lows again, but it doesn’t base, it doesn’t base here and it doesn’t base here.

5:25
What it does is it, it bounces in a V-shaped pattern and it goes right back up. So, go to January 2016, all right? You have a massive sell-off to start the year off, and it tried to bottom in the middle, middle of the month on January 20th, and the V shape just went straight back up.

5:44
And then it retested the lows again. So again, you can say that’s a U-shaped bottom because there’s, there’s a little bit of a basing pattern, but then in the end, all it is is a dead cat bounce with a V-shaped pattern followed by a sustained bounce that went to new all-time highs.

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So, yeah, very much like what we saw in August 2015 with two attempts at the bounce. Now. Go to June 2016. This is your Brexit, right? This is where things really start to go fast forward.

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And I really thought Brexit was. That was really something right here. OK. So this is the whole Brexit hoopla, OK? Sells off 2 days. Brexit was a 2 day set event, really. I mean they had talked about it leading up to it and everything else, and it created a lot of volatility and stuff at times, but ultimately the vote and everything else resulted in a 2 day sell-off that went straight back up, OK, a 2 day event that was talked about for a long time, it’s back at all time highs not too soon thereafter.

6:47
Now you go to, now, this is my favorite, the 2016 election, right? The reason why I say that is because. Everybody thought that the market was going to sell off and Donald Trump got elected. It was considered a, a long shot that it wasn’t going to happen, and everybody was kind of pricing in the fact that a Hillary Clinton presidency would be it and because it was more of like the same of the Obama presidency where the market rallied that it would result in more years of the market rallying, well.

7:15
I actually sold all my long positions before that election because I actually did think based off of what we saw with Brexit and how the demographics were voting in the Brexit compared to the similarities in the Donald Trump election. That Donald Trump was actually going to win and so I sold my long positions because I thought, you know, the market would probably sell off and it did, but the problem was is that I was wrong about the duration of the sell-off.

7:38
So when he started winning Florida and they won Pennsylvania, the market started selling off. The Dow is down like over 1000 points in the futures, which is significant. You don’t ever hardly see those kinds of moves in the pre-market, we saw some, uh, last quarter, but it’s very rare. They put the breakers on.

7:54
And it calmed the markets, and when they opened the market back up, it started trending higher. By the time that the market actually opened on the, the day that Trump won the election. It’s almost back to break even on the day, so, uh, that was pretty crazy. So I was right on the election results, but I was wrong on the market direction, uh, in the extent of how long it would stay down, and as a person who trades equities, I don’t trade futures.

8:15
It didn’t really stay down long enough for me to make that much off of it. So, uh, it took me about a day. I got back to the long side and, uh, you know, 2017 was a great year for stocks to the alongside, and, um, yeah, I did fine, but. Um, So we talked about the election, we talked about the Brexit.

8:32
Let’s fast forward to May 2017. Another one-day sell-off. I, offhand, I really don’t even know what the the sell-off was for, but look at this. Sell off panic. Goes right back up, OK?

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February 2018, OK. Market had just rallied like crazy during January. It was like a 7 or 8% that month, and then the bottom fell out from underneath it and it got ugly, OK? But it didn’t. It didn’t just base at all, it bounced really hard.

9:07
And then the following subsequent subsequent months, there were some uh attempts to retest those lows, and then you, this is really almost like the best, best U-shaped bottom I can find for you here, really. But I mean, even then, this was just sloppiness, the bounce. did happen and then it came back and settled in for a while and then the trend resumed.

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You can see here, higher lows or higher, lower high or higher lows. Goodness gracious, I’m getting my terminology mixed up here, but higher lows all throughout the rest of the year until The 4th quarter comes along, and this got really hairy, man.

9:39
I mean, this, look at this. This was like one of the longest, uh, sell-off durations that we had seen since the Great Recession, and it lasted for a good solid 3 months. And then what did it do? December 24th, it hit its hit it’s, uh, had its worst day and then December 26th, the day after Christmas, it went even a little bit lower for just a little bit of time and then it rocketed, rocketed higher, and it just kept on going and going and going, and that’s what we’ve been on ever since.

10:07
We had a little mini selloff last week, right? What did it do? Bounced right back up today and we’re back at New Raleigh highs, so. V-shaped bombs look like they’re here to stay. Um, don’t, don’t expect U-shaped bomb. Now you can have them on individual stocks, and that’s, that’s common, but I wouldn’t expect it on the indices that much anymore.

10:27
Um, once again, technology has changed that quite a bit, you know, the, the pricing in of, of various events happens at breathtaking speed now, and, uh. Price pricing gets figured out a lot quicker than they ever did 50, 60 years ago. So, going forward, expect these kinds of uh balances, and as the technology improves, I would expect it to even happen faster and faster.

10:49
So that’s gonna be the discussion for today. Hopefully, hopefully it helped you out some here and uh if you have any questions, always feel free to, um, shoot me an email. Also, subscribe to the Trading Block. It’s a great place. I’d highly recommend it. Take care. God bless. Thanks for listening to this week’s podcast of Swing trading with Ryan Mallory.

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That’s www.shareplanner.com/trading-block. And follow me at SharePlanner on Twitter and on SharePlanner’s Facebook page where I provide unique market and trading ideas every day. If you have any questions, please feel free to email me, ryan@shareplanner.com.

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All the best to you and God bless.