The U.S. stock market’s recent volatility has been very high. We demonstrated in this study that high volatility is a short term bearish sign but a medium term bullish sign for the stock market. Here’s another way of looking at it.
The S&P experienced 4 consecutive days of >1.5% movements (CLOSE vs. CLOSE $) from March 22 – 27, 2018. Some traders think that such high volatility is “bear market behavior”. I disagree.
- This is a very common signal. There is nothing rare about 4 consecutive days of >1.5% movements.
- This is a medium term bullish sign than a bearish sign outside of recessions. There is no recession right now.
Here are the historical cases when the S&P experienced 4 consecutive days of >1.5% movements.
- June 29, 2016
- August 11, 2011
- There were a bunch of cases in 2008. But that’s because the economy was in a recession.
- There were a bunch of cases in 2001-2002. But that’s because the economy was in a recession.
- April 17, 2000
- May 27, 1999
- September 11, 1998
- October 12, 1990
- October 16, 1987
- October 11, 1982
- There were a bunch of cases in 1974. But that’s because the economy was in a recession.
- There was one case in 1970. But that’s because the economy was in a recession.
- August 31, 1966
- May 31, 1962
Here is what the S&P 500 (U.S. stock market) did next.
June 29, 2016
August 11, 2011
April 17, 2000
May 27, 1999
September 11, 1998
October 12, 1990
October 16, 1987
October 11, 1982
The S&P continued to surge over the next 6-12 months. This historical case doesn’t really apply to today. All the volatility was towards the upside (the S&P surged more than 1.5% for 4 consecutive days). The stock market’s current volatility is to the downside.
August 31, 1966
May 31, 1962
This study sends a loud and clear conclusion:
The stock market might face some short term weakness over 2-3 weeks, but the medium term is decisively bullish. Downside risk is limited.
The notable thing is that even in the beginning of a bear market, the S&P rallied for 4.5 months after this signal came out. The Medium-Long Term Model does not believe that this is a “significant correction” or a bear market.