The hindsight bias tends to be a common phenomenon in the financial markets and everyday life. A theory surrounding hindsight bias is we tend to look back at a previously unpredictable event and think it can be easily predictable. A consequence is that believing you knew it all along can lead to an overreliance on the accuracy of your predictions.
Hindsight bias is a psychological phenomenon, or a cognitive bias, in which people, including stock market pundits, overestimate their ability to predict outcomes, leading to overconfidence in their ability to make accurate decisions.
The hindsight bias includes three (3) levels: (1) Memory distortion (i.e., since I made this call, it must happen in the future). (2) Inevitability (i.e., it had to happen). (3) Foreseeability (i.e., when prediction fails to materialize, you would say that I knew it would happen).
Hindsight bias differs from confirmation bias as the latter refers to the tendency to look for information that can support your earlier beliefs and predictions. While the former refers to the belief that you could have predicted an event that happened in the past.
It is best to avoid the two biases as both are detrimental to successful investing.
Investors need to acknowledge that we all have biases in life and take the time to reflect upon the question at hand without any preconceived biases, specifically unsupported or unsubstantiated claims.
In almost all cases, this bias is equally dangerous to investors. Compiling incorrect information and processing and interpreting this data can lead to false conclusions.
Hindsight is 20/20 but does 20/20 implies it is hundred percent accurate?
Predicting the future in an area as complicated and complex as the financial markets is no easy task. Foresight is a 50/50 proposition, at best.
With the above thoughts in mind, we will look into the future trend of the S&P 500 Index, paying specific attention to the longer-term or structural trends. In hindsight, it is easy to see what you should have done differently.
From the Mar 2020 pandemic low, SPX quickly recorded a new all-time high on 1/4/22 at 4,818.62. Upon setting a record high, it is unusual to see a negative-outside monthly reversal pattern developed toward the end of the month.
The failure of SPX to convincingly clear the top of the 2009/2010 uptrend channel (now at 5,208) was another warning sign of a market top. A subsequent breakdown below the 10-month ma (green dash line -currently at 4,100) in Jan 2022 further warned of an intermediate-term market top.
In Jun 2022, SPX violated its 30-month ma (3,976). Before this event, SPX also broke the 2/24/22 low at 4,114.65 in May 2022, confirming a neckline support breakdown and solidifying a top. A head and shoulders top breakdown suggests 704.07 points decline to 3,410.5.
The Jan-Oct 2022 SPX downturn has resulted in a 1,327.04-point drop or -27.5%, placing the selloff firmly within the territories of a bear market (greater than 20%).
However, the pertinent question remains - is this a cyclical bear decline or the start of a structural bear/trading range market?
To answer this question, we review two significant monthly technical indicators and the monthly SPX trend dating back to the end of the 2009 global financial crisis and the great recession market bottom (666.79).
The monthly MACD price momentum and the RSI overbought/oversold indicators have fallen to the bottom of their respective supports. The outcome of these tests can help solidify the October 2022 lows as a market bottom or trigger the next SPX selloff.
Over the past 12 years, it is uncanny that the monthly RSI overbought and oversold indicator (currently at 48.37) found pivotal support near the 40-50 oversold levels (42.5 - Sept 2022 low). The monthly RSI indicator rebounded each time it approached the 40-50 level, including the oversold conditions that developed during Jun 2010 low (44.90), Sep 2011 (43.27), Feb 2016 (49.39), and the Mar 2020 Covid-19 pandemic low (42). There was only one exception, during the final stage of the global financial crisis, RSI plummeted to an extreme low of 17.96 (Feb 2009).
In the case of the MACD indicator, it coincides with the bottom of the 2009/2011 uptrend channel. After peaking in Dec 2021, the monthly MACD price momentum indicator continues to decline. The ability to rebound from the bottom of its 2010 uptrend channel may help contain the selling momentum, setting the stage for another momentum low. However, violation here warns of a deep decline.
On the monthly SPX price chart, the recent decline to the 10/13/22 low at 3,491.58 rebounded from critical support at 3,364-3,509 or the middle of the 2009/2010 uptrend channel (3,588), the 50% retracement (3,509) of the Mar 2020-Jan 2022 rally, the 1-year head/shoulders neckline breakdown target (3,410.5), and the Aug V-pattern 2020 breakout (3,393.5).
Failure to maintain support at 3,491.58 warns of a decline toward the 61.8% retracement (3,200) from the 2020-2022 rally. Below this to the bottom of the 20009-uptrend channel (2,900). A breakdown ends the 2009 structural bull trend and warns of a structural bear/trading range market.
The 10/13/22 oversold rally nears pivotal resistance is 3,976-4,100, coinciding with the 10-month and 30-month moving averages. A recent sharp convergence between the two moving averages is noteworthy, as the spread contracting to 124.23 signals an impending monthly inflection.
A successful test of 10-mo ma (4,100) above the 30-mo ma (3,976) confirms a bullish outlook, possibly leading to the resumption of the May 2013 structural bull trend. On the other hand, if the 10-month moa crosses below the 30-month ma, it confirms a bearish death-cross sell signal and warns of a decline to 2,900-3,200.