Study: the stock market will be higher in a few months


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…

  1. The S&P rallied at least 4% in the past 2 months, and…
  2. Made a new 1 year high in those 2 months, and…
  3. Wiped out all the gains in just 7 days.

Here are the historical cases:

  1. February 5, 2018
  2. January 26, 2010
  3. February 16, 1993
  4. September 15, 1986
  5. October 16, 1979
  6. October 3, 1955
  7. December 4, 1950

Here are the historical cases in detail.

January 26, 2010

This was a 9.2% “small correctoin”. The S&P made a new high in March 2010.

February 16, 1993

This did not even occur during a 6%+ “small correction”. This occurred during a pullback. This historical case does not apply to today because the S&P has already made a 10.1% “small correction”.

September 15, 1986

This signal came out during a 10.2% “small correction” (very similar to today). The S&P made a new all-time high in December 1986.

October 16, 1979

This signal came out in the middle of an 11.6% “small correction”. The S&P made a new high in January 1980.

October 3, 1955

This signal came out in the middle of a 10.5% “small correction”. The S&P recovered all of its losses by November 1955.

December 4, 1950

This happened during a 6.5% “small correction”. The S&P made a new high just a few weeks later.

Conclusion

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.

Keep in the mind that this signal came out on Monday. The S&P has already made a marginal new low since then.

18 comments add yours

  1. Hi Troy:
    How exactly do you manage stop losses? At some point, if the model is wrong, do you do something, or just wait? 3X leveraged can be deadly in that situation.

    • The stop loss is not a pure $ determined loss. That would be silly: you might cut at the very bottom. The stop loss is when the Model says “this is a bear market & not just a correction”. In essence, it can differentiate between just a correction and the start of a bear market.

      • Yep, I don’t have any stop losses myself.
        Just read some fear articles about how we are so close to a bear market; made me wonder what if the model is wrong haha.
        I feel like I am a disciple of Troy. Feels good; haha!

        • Ahmad, anything is possible. But in trading and life we can only act according to what is probable.
          And I do have a stop loss, it’s just that I don’t use a price driven stop loss. E.g. selling just because the market fell 10% makes no sense. What happens if the market falls 10%, you cut loss, and the market reverses up? You would have cut at the bottom of the market!
          Only cut loss if your market outlook changes. My market outlook does not chase the price. I don’t become bullish just because the market is going up and I don’t become bullish just because the market is going down.

          • Of course you don’t become bullish just because the market is going down.
            Why would I become bullish if the market is down?

  2. Hi Troy,
    Thanks so much for your market scenarios. I’ve been swing trading around them by scaling SHORT into your spot on correction call and now will patiently wait to scale LONG into the rebound when it comes as confirmed by the price action.
    Thanks again!
    Rich

  3. Hi Troy. Are the monthly candles forming on the indices starting to send an ominous warning to the bulls?

    • Not really. Personally I don’t find monthly candles to be very useful. The time frame is way too long.

  4. How do you find the patterns you’re looking for in your charts? As in do you have a program that you can punch in criteria or do you write scripts or some other method?
    Also how much do you think retail trading affects the market? This correction seems a bit faster than normal and I’m wondering if it really can be attributed to retail (I think Cramer said something about it) or it’s to be expected given how fast the market ran up.
    Thanks! Love your blog -it’s a great reality check.

    • No program of that kind. I come up with the patterns I’m looking for in my head. I ask myself “what best describes the market right now? What’s the feature about the stock market today that strikes me the most?”
      Yes, this correction is actually the fastest 9%+ drop in history. I wouldn’t attribute it to retail. I’d attribute it to faster information flow. And it’s not just in stocks. It’s in everything (e.g. cryptocurrency). Rallies are fiercer, and so are market declines. There’s too much money in this world.

  5. Hi Troy… The significant correction of May 2010 ..do you consider that happening after a strong momentum or a weak one . To me it looks like Markets were rallying for a while then putting an abrupt top and rolling over like the one we are having now . Agreed that the Flash Crash of May 6 did a lot of damage weakening whatever momentum that existed .

    • That happened after momentum had weakened. Momentum was very strong in 2009 because the S&P rallied nonstop. The small correction in early 2010 weakened SPX’s momentum.

  6. So Are you just holding till the market signals a change in direction. Not acting on the stock itself going up or down would suggest a buy and hold strategy, correct?
    Thanks!

    • Yes. Essentially the model buys and holds unless:
      1. It predicts a bear market
      2. It predicts a significant correction
      3. It fails to predict a bear market, the market starts to go down, the and model realizes “this is just just a correction. This is the start of a massive bear market”

  7. Hi Troy,
    What you mentioned about stop-loss has happened to me in the past.
    I suppose the question that I am really trying to get at is this.
    I frankly do not care about bear markets, but as 3x ETF holder, I suppose I should; I have a mentality to just keep on buying, and dollar cost averaging.
    My fear is that if a bear market comes randomly at shock, I can’t just say “I’ll continue to add to the 3x ETF”, since Direxion itself might go out of business in such a situation perhaps?
    Have you ever done a study to see how a 3x ETF like UPRO would perform in a bear market; I know we will lose some value, but suppose the underlying ETF (Spy?) is back in the green, and at its peak; say 3 years later, will I also least be back in the green?

    • You’re absolutely right Ahmad. You cannot hold UPRO in a bear market. A thereotical UPRO would have fallen 95% in the 2007-2009 bull market.
      And yes, I do know how much UPRO would erode from the previous bull market’s peak to a new all-time high after a bear market. I don’t have the data in front of me right now, but it’s a lot. Hence why avoiding bear markets is so important.

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