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The US stock market has done this only twice in 227 years – Will Bitcoin follow?

The US stock market has done this only twice in years Will Bitcoin follows

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TL;DR

The US stock market history has many financial lessons up its sleeves, provided the right investor is willing to study keenly. Every historical chart, with a sufficiently larger timeframe, shows valuable teachings. One such interesting finding has been unearthed by Professor Emeritus Edward McQuarrie of the Leavey School of Business at Santa Clara.

Source: Edward McQuarrie, HulbertRatings

In his chart spanning 227 years of US stock market history, he discusses how the market behaves whenever it trades above trend. Edward says that the current US stock market is trading above-trend – an event that only occurred twice in the past. Unfortunately, the markets didn’t end well whenever such a situation arises on the charts.

To put it in his words, the stock market is due for a 43 percent correction in order to streamline with the longest-possible historical trend.

Do technical indicators point towards a 43 percent US stock market correction?

In order to understand Edward’s chart, we have to learn about the long-term trend dating back to 1793. His chart shows the data after appropriate inflation and dividend adjustments. He has drawn the exponential trendline to match studies with logarithmic scale.

As seen in the chart, in the past 227 years, there have been only two incidents when the stock market went under the exponential trendline. Both the time periods have been historically known to be highly opportune periods to build long-term bullish positions. In short, there is an alarming technical indicator flashing red signals to steer clear of the market.

The first time period is the chaotic late 1960s and the second period includes the internet bubble. Every investor worth his salt knows that both these occasions are remembered as highly bearish periods culminating in a multi-year bear US stock market. So, where does Bitcoin comes in all these dire predictions?

Read the history to know Bitcoin’s future trajectory

If the stock market is due to face a traumatic event in the near future, Bitcoin is definitely going to suffer as well. Though theoretical, the probability of Bitcoin being affected by a US stock market turmoil has increased due to its rising correlation with the S&P 500 index.

Source: Skew

Now, 227 years is an extremely long period to study, especially when you consider various micro-events underneath a chart of such a long duration. In case the market does face a catastrophic correction, Bitcoin is poised to bounce back strongly due to its safe-haven characteristics.

The exponential trendline in Edward’s chart is drawn with reference to a certain time frame. A hundred-year period would unearth different results. Nevertheless, bearish scenarios can be understood with a keen eye on history. Bitcoin has faced and recovered from a similar situation back in 2017. In its relatively young existence, Bitcoin has weathered many storms.

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Gurpreet Thind

Gurpreet Thind is pursuing Masters in Electrical Engineering at University of Ottawa. His scholarly interests include IT, computer languages and cryptocurrencies. With a special interest in blockchain powered architectures, he seeks to explore the societal impact of digital currencies as finance of the future. He is passionate about learning new languages, cultures and social media.

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