Longest stock market rally in history without a 6%+ small correction


As of late-October 2017, this is the longest S&P 500 rally in history without a 6%+ “small correction”.

  1. Current rally’s magnitude: 35.3%
  2. Current rally’s time: 376 trading days (as of December 21, 2017).

Here are the next 7 longest rallies in history.

  1. October 5, 1992 – January 31, 1994. 335 trading days.
  2. September 9, 1994 – February 13, 1996. 297 trading days.
  3. October 24, 1962 – October 29, 1963. 255 trading days.
  4. March 12, 2003 – March 5, 2004. 248 trading days.
  5. July 25, 1984 – July 17, 1985. 247 trading days.
  6. October 30, 1978 – October 5, 1979. 236 trading days.
  7. November 16, 1988 – October 10, 1989. 226 trading days.

October 5, 1992 – January 31, 1994 (335 trading days)

This is the longest historical rally (after the current rally). Here is the daily bar chart.

There are 2 main differences between the current rally and this historical rally.

  1. Historical rally: the S&P rose 23% from the beginning of the rally to the end.
  2. Current rally: the S&P has risen 35.3%.
  3. Historical rally: the S&P went up in a very choppy fashion with many 3%, 4%, and 5% pullbacks.
  4. Current rally: volatility in the stock market is insanely low.

After this historical small rally was over, the S&P made a 14% correction in 1994. Our model predicted this significant correction.

September 9, 1994 – February 13, 1996 (297 trading days)

This was the rally that started the internet boom. The S&P soared 49.9%! The S&P made a 6% small correction after this HUGE rally. Here is a chart.

This historical case is similar to today’s rally.

  1. A massive rally (in terms of magnitude).
  2. Very low volatility.

Read this post for studies that demonstrate how similar 2017 is to 1995.

October 24, 1962 – October 29, 1963 (255 trading days)

The S&P rose 43% because it was climbing out of the shadow of 1962’s massive “significant correction”(the S&P fell 28%). Obviously, this is not comparable to today because the S&P isn’t climbing out of the shadow of a massive correction right now. Here’s the chart.

The S&P made a 7.5% “small correction” after this rally was over.

March 12, 2003 – March 5, 2004 (248 trading days)

The S&P soared 47% because this was the first real rally from the 2000-2003 bear market. The first rally in every bull market is ALWAYS very fierce because there’s a strong mean-reversion theme going on. Obviously, this historical case cannot be applied to today. We are nowhere near the bottom of a bear market. We are in the final 1/3 or final 1/4 of the current bull market. Here’s the chart.

After this rally, the S&P made a small correction that was very long (84 trading days).

July 25, 1984 – July 17, 1985 (247 trading days)

Coming out of the 1983-1984 significant correction (which our model predicted), the S&P rallied 33%. Then it made a 8.4% “small correction”. Here’s the daily bar chart.

This case is similar to today in 2 ways:

  1. The current rally’s magnitude is 35.3%.
  2. The current rally occurred after a significant correction from 2015-2016.

October 30, 1978 – October 5, 1979 (236 trading days)

The S&P rallied 22.3% during this historical rally. This historical case does not apply to today because the U.S. economy was clearly slipping into a recession at the time. U.S. economic growth is robust today. Here’s the chart.

November 16, 1988 – October 10, 1989 (226 trading days)

The S&P rallied 34.2% in this historical case. That is comparable to today’s rally. HOWEVER, this historical rally occurred while the U.S. economy was clearly going downhill. U.S. economic growth is robust today and shows no signs of deterioration. Here’s the chart.

This historical rally ended when the S&P made a 9.2% “small correction”.

Conclusion

These 2 historical rallies are most similar to today.

  1. September 9, 1994 – February 13, 1996. 297 trading days.
  2. July 25, 1984 – July 17, 1985. 247 trading days.

Both of these historical rallies were followed by a “small correction”. This makes sense. Rallies are extremely long when the “buy the dip” mentality is strong. So when the S&P makes a correction, investors will buy the dip and prevent the “small correction” from turning into a “significant correction” (as defined by our model).

Why is the current rally so long?

Here’s why I think the current rally has broken historical records.

  1. Lack of alternatives. Interest rates are near all-time lows. So bonds aren’t attractive. Real estate prices in major cities are sky-high (thanks to Chinese speculation).
  2. The tax cut. Historically, major tax cuts (e.g. Reagan’s tax cut in 1986) have always resulted in massive S&P 500 rallies. History rhymes. The current rally coupled with Trump’s tax cut is no exception.
  3. There is more “dumb money” than ever before. Part of this is due to Chinese money. Chinese money is causing massive asset bubbles in real estate, art, and cryptocurrency. (Chinese money laundering is how Bitcoin first became popular). The Chinese today are similar to the Japanese in the 1980s. They LOVE speculation, and they have such an insane herd mentality.

Rallies, bull markets, and bubbles are being stretched in all assets. Global money is flowing faster than ever before. E.g. Bitcoin is literally the fastest bubble in history. Most historical bubbles only had 2 parabolic legs with 1 big correction in between. Bitcoin has had 4 parabolic legs! Here is Bitcoin’s weekly bar chart in log scale.

*I don’t like to use the word “dumb money”. It’s very hard to separate “smart money” from “dumb money”. Are hedge funds “smart money” or “dumb money”? As a professional industry, hedge funds should be smart money. But they’ve consistently underperformed the S&P over the past 10 years.

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