Here’s the most notable part of the current correction:
The stock market INSTANTLY reversed from “risk on” mode to “risk off mode”.
The stock market was soaring before it made an extremely rapid “small correction”. Historically, this has been a very bullish setup. Here’s the study: what happens when…
- The S&P rallied at least 4% in the past 2 months, and…
- Made a new 1 year high in those 2 months, and…
- Wiped out all the gains in just 7 days.
Here are the historical cases:
- February 5, 2018
- January 26, 2010
- February 16, 1993
- September 15, 1986
- October 16, 1979
- October 3, 1955
- December 4, 1950
Here are the historical cases in detail.
January 26, 2010
February 16, 1993
September 15, 1986
October 16, 1979
October 3, 1955
December 4, 1950
This is the most important conclusion:
The S&P 500 will not make a “significant correction”. This is just a “small correction” that most likely will not exceed 12%.
This conclusion is logical. When the stock market rises more than 4% in 2 months and makes a 1 year high, its’ momentum/sentiment is very high. Markets don’t die i.e. (make a significant correction) when momentum is extremely high. Markets die after momentum has weakened.
When momentum is very strong and the stock market makes a correction, the “buy the dip” mentality is strong enough to push stocks to new highs. The “buy the dip” mentality prevents the “small correction” from turning into a “significant correction”.
I do not expect the current correction to turn into a “significant correction”. The Medium-Long Term Model does not state that this is a “significant correction”. The model has failed to predict 3 significant corrections since 1950, and I don’t think the current case will turn out to be a failure.
There’s another important conclusion from this study:
The stock market will probably swing sideways or fall a little more over the next 1-2 weeks.