The October correction in the US stock market led to a strong local oversold. This, in principle, is understandable (not every month the indices decrease by 5-10%), but, in addition, it is confirmed by some objective data.
On the diagram above, the arrows show the weeks when the outflow of funds from equity funds (mutual funds and ETF) exceeded $ 15 billion. Now the third outflow is observed in 2018 (17.5 billion). That is, if we assume that the long-term uptrend remains in force, then this situation with a high probability will lead to the formation of the next local bottom.
Firstly, as is well seen from the previous cases of record outflows, often after a short bounce upward followed by a second bottom, below the first. The schedule is weekly, so the whole process (rebound, and then the second bottom) can be delayed for 2-3 months. That is, the scenario with the Christmas rally in November-December and entering a new minimum in January-February is quite likely. Keep this in mind if only because the probability of a V-shaped reversal is small.
Secondly, and more importantly, the state of extreme oversold occurs at the very beginning of the long-term downtrend. We do not know in advance at what point the indicator, which for several years worked as a buy signal, will cease to be and will become a sign of a change in the long-term trend. Logic dictates that the longer we are in a cycle, the closer its reversal. And now this development is, of course, more realistic, since the indices have grown too much when compared with history.
Which of these scenarios is more likely depends on the personal perception of the situation: the news background, expectations, etc. Our subjective view is this: if the market does not rebound by the end of October, and SPY closes the month below 272 (now 276), then January minimums test in the 2018 range of 250-255 will become a reality. By the way, even this re-test will not affect the long-term trend, despite its rigidity for short-term speculators.
If the market goes up, and SPY rewrites 281 (the maximum of the recent rebound), then a new historical maximum above 294 will be more likely, and the transition to the new bear market will be postponed, most likely, to the second half of 2019.