Although there are plenty of fundamental excuses for the retest of the October low last week, we continue to believe it is all part of the bottoming process playbook we have been highlighting since late October. We have referred to this as the “slop, pop, and drop,” where the market: (1) makes an initial low highlighted by an extreme oversold condition with a peak in volatility; (2) then experiences a sharp oversold bounce that recoups a significant part of the decline; and (3) ends with a retest of the low that brings demoralization, apathy, and no buyers. This cycle is not just longer than prior cycles without a recession – it is a lot more volatile, which means human nature becomes more important throughout the bottoming process. We highlight our three main requirements to determine if a decline is an intermediate-term correction in an ongoing bull market, or something worse.
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