Study: prepare for a significant correction or bear market in 2019


Based on the Medium-Long Term Model’s current trajectory, the S&P 500 will probably begin a “significant correction” or bear market sometime in 2019 (most likely second half of 2019). This is a moving target and will change as we get more data.
The recent correction broke a lot of records: record number of consecutive days without a 1% movement, record # of “close highers” in a month, longest rally without a 3%+ pullback, etc. But there’s another historic streak that still stands.
The S&P has closed above its 200 daily moving average for 421 consecutive days. Here are all the historical cases in which the S&P closed above its 200 sma for at least 400 consecutive days.

  1. January 29, 2018 (present case)
  2. June 23, 2014
  3. February 27, 1998
  4. June 27, 1955
  5. March 7, 1952

Here’s what happened next to the S&P 500.

June 23, 2014

The next correction was not a “significant correction”. It was a 9.8% “small correction”. The next 15.2% “significant correction” began 11 months later in May 2015.

February 27, 1998

The next 22.4% “significant correction” began 5 months later in July 1998.

June 27, 1955

The next 21.4% “significant correction” began more than 1 year later in August 1956.

March 7, 1952

The next 14.8% “significant correction” began almost 10 months later in January 1953.

Conclusion

This study suggests that the current “small correction” in stocks will not turn into a “significant correction”. The next “significant correction” is at least months away. The beginning of a “significant correction” or bear market in 2019 is almost guaranteed. Our Medium-Long Term Model agrees with this study’s conclusion.
An extremely long consecutive streak above the 200 sma implies that the U.S. stock market’s momentum is very bullish. Markets don’t die on extremely strong momentum. Markets die after momentum has already weakened (i.e. bearish divergence).
Read Stock market on March 1, 2018: outlook

4 comments add yours

  1. Hi Troy:
    As a fellow 3x ETFer, are we not playing with fire with a correction being so close?

    • Not really.
      1. The stock market can go up a lot in the final 1-2 years of a bull market. 20-40% gains in the S&P are completely normal, which means that UPRO could go up 100%+
      2. The model does have a stop loss (i.e. telling me that this is definitely the start of a bear market). The stop loss isn’t price dependent, but it’ll probably come out when SPX is down 7-8% (i.e. UPRO is down 21-24%).
      3. So I risk 20% for a 100% gain. That’s a great risk:reward ratio. And the portfolio has soared throughout this bull market. Sticking to the strategy is statistically more profitable than not sticking to the strategy.

  2. Hi Troy,
    I came across the comments in this post and couldn’t help but wonder, did the stop loss of your medium-long term model kick in during the Jan 29 – Feb 9 2018 correction (UPRO down 35%)?
    Thanks,
    Frank

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