Study: "buy the dip" mentality will keep the bull market going


The stock market’s rally before the current “small correction” was steady and incessant. It set record after record:

  1. Longest rally in history without a 3% pullback
  2. Record number of “closer highers” in a month
  3. Record number of consecutive days without a 1% movement
  4. Volatility was insanely low
  5. Longest rally in history without a 6%+ “small correction”

History shows that when an incessant rally is over, the next decline is just a “small correction”. It is neither a bear market nor a “significant correction”.
This is logical. Incessant rallies leave a lot of people on the sidelines. When the stock market is rallying, a lot of investors who aren’t in the market are looking to “buy the dip”. When the market finally does correct, these investors rush into the market and prevent the “small correction” from turning into a “significant correction” or bear market.
Here’s the historical study. What happens when:

  1. The S&P 500 went at least 100 consecutive trading days without a 3%+ decline, and….
  2. The S&P makes a 3%+ decline.

This study is based on a previous study.
Here are all the historical cases.

  1. November 7, 2016 – February 2, 2018 (current case)
  2. January 26, 1995 – January 9, 1996
  3. July 7, 1993 – February 23, 1994
  4. November 26, 1963 – June 3, 1964
  5. September 2, 1965 – February 23, 1966
  6. December 17, 1964 – June 1, 1965
  7. January 27, 1983 – June 27, 1983

Let’s look at how each of these historical streaks ended.

January 26, 1995 – January 9, 1996: 241 days

This streak ended with a normal 4.3% pullback. It didn’t end with a significant correction or bear market.

July 7, 1993 – February 23, 1994: 162 days

This streak ended with a 9.7% “small correction”. It didn’t end with a big correction or bear market.

November 26, 1963 – June 3, 1964: 131 days

This streak ended with a normal 4.8% pullback. It didn’t end with a significant correction or bear market.

September 2, 1965 – February 23, 1966: 120 days

This streak ended with a 23.6% “significant correction”. This historical case doesn’t apply to today because the Medium-Long Term Model doesn’t foresee a significant correction right now.
The U.S. economy deteriorated from 1964-1965. The U.S. economy is improving today. The economy leads the stock market in the long run.

December 17, 1964 – June 1, 1965: 114 days

This streak ended with a 10.9% “small correction”. It didn’t end with a significant correction or bear market.

January 27, 1983 – June 27, 1983: 105 days

This streak ended with a 7.6% “small correction. It didn’t end with a significant correction or bear market.

Conclusion

This study suggests that the current -11.8% “small correction” will not turn into a significant correction or bear market. The stock market’s “buy the dip” mentality is still very much alive, which will prevent this small correction from turning into a significant correction or bear market.
Bull markets end when volatility has already increased. The stock market’s volatility in 2017 and January 2018 was insanely low, which suggests that this is not the start of a bear market.

2 comments add yours

  1. Hi,
    it would be interesting to know which events are capable of crushing the buy-the-dip attitude. I had the impression, that mixed earning reports from Apple and Alphabet already alienated many investors and were a main driver for the latest correction.
    Regards,
    Torsten

    • It’s impossible to know beforehand which events will crush the buy the dip attitude. But earnings reports generally don’t cause that sort of decline. The stock market literally never goes down during earnings season in a bear market. You can see the historical cases in 2008, 2001-2002, etc. SPX always flat or up during earnings season.
      Kind regards,
      Troy

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