Study: what happens when the stock market suddenly reverses


The U.S. stock market was rallying vigorously until 2 weeks ago. Then it tanked last week. Using the weekly CLOSE $, this was the S&P 500’s worst week in more than 1 year.

Here’s the study:

What happens next when the S&P 500 made a 52 week high last week, and this week was the worst week in 1 year (52 weeks). Use weekly CLOSE $.

Here are the historical cases, using each week’s start date:

  1. January 29, 2018 (present case)
  2. December 8, 2014
  3. October 9, 1989
  4. March 31, 1986
  5. October 25, 1982
  6. June 1, 1959
  7. March 7, 1955
  8. October 11, 1954

Let’s look at these historical cases in detail.

December 8, 2014

The S&P’s next 15.2% “significant correction” began more than 5 months later in May 2015.

October 9, 1989

The S&P cratered this week. It made a 9.2% “small correction” in 4 days. The next 20.3% “significant correction” began 9 months later in July 1990.

March 31, 1986

The next 8.4% “small correction” began more than 3 months later in July 1987. The next significant correction began almost 1.5 years later.

October 25, 1982

This marked the bottom of the S&P’s 6.3% “small correction”. The next significant correction began almost 1 year later in October 1983.

June 1, 1959

The next 14% “significant correction” began 2 months later in August 1959.

March 7, 1955

This marked the beginning of a 6.8% “small correction”. The next significant correction began 1.5 years later.

October 11, 1954

The next 6.8% “small correction” began 4.5 months later in March 1955.

Conclusion

We can infer 2 conclusions from this study.

  1. Many of these cases marked the beginning of a 6%+ “small correction”.
  2. The next “significant correction” is at least 2 months away. It is not imminent.

The Medium-Long Term Model agrees with this study. A significant correction is not imminent.

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