Study: this is not the start of a bear market


I explained why this isn’t the start of a bear market from a fundamental point of view. This also isn’t the start of a bear market from a technical point of view.
Volatility (VIX) was at its lowest level in this bull market just before the current “small correction” began. Historically, VIX rises months before a bull market ends.
Here’s VIX right now.

Contrast this with increasing volatility before the previous 2 bear markets (2007 and 2000).
Here’s VIX before the U.S. stock market topped in October 2007.

Here’s VIX before the U.S. stock market’s top in March 2000.

I don’t like to use VIX as a volatility indicator. VIX’s history is extremely limited. Here’s a simple way to gauge the stock market’s volatility.

How many 1% days (up or down) did the S&P have over the past 3 months (63 trading days)? Use today’s CLOSE vs yesterday’s CLOSE $.

Here are the number of 1% movements in the 3 months before each of the S&P’s previous bull market peaks:

  1. January 26, 2018 (the S&P’s top before the current correction): 1
  2. October 11, 2007: 24
  3. March 24, 2000: 28
  4. January 10, 1973: 4
  5. December 2, 1968: 7

As you can see, it’s not normal for the S&P to have almost no 1% movements just before a bull market tops. The one single 1% movement in the 3 months leading up to January 26, 2018 happened on the day of January 26, 2018. In other words, the S&P broke its record streak of no 1% movements with a 1% surge on January 26.
Here are the historical cases in detail.

October 11, 2007

March 24, 2000

January 10, 1973

December 2, 1968

Today

Conclusion

Bull market peaks are preceded by at least a little volatility. This is because momentum must weaken before a bull market can end. Bull markets don’t top on insanely overbought momentum.
The U.S. stock market’s complete lack of volatility before this correction implies that the current correction will not turn into a bear market. The “buy the dip” mentality is sill strong enough to push the S&P 500 to new highs.
Read The stock market today is not like 2007 or 1987

4 comments add yours

  1. Hi Troy.. In an other post of yours ..you have mentioned that Stock Markets are looking very similar to 1986/87 . And in 1986 there were 2 back to back 10 % correction . Do you think there is going to be another small correction coming in Q2 or Q3 of 2018 and then a deeper decline in late 2019 ?

    • I don’t like to guess each wave of the stock market. I’m not smart enough to 🙂
      But yes, I actually think that’s the most likely scenario. A new high, followed by another 6%+ “small correction” in the 2nd half of this year, a blow off top, and then something big next year. Don’t know if the bull market will top in 2019 or if it’s just a significant correction. Will have to see then.

  2. When you encounter a bear market, do you sell all UPRO into cash only? Or do you instead switch to buying bonds, short the market, or simply average down on index ETF/funds?

    • I switch into cash. I’ve thought about switching into bonds, which normally works during bear markets because interest rates tend to fall when the stock market enters into a bear market.
      I might buy TIPS during the next bear markets. I expect the next bear market to be accompanied by mid-high single digit inflation.

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