What happens when the S&P is above its 100 moving average for too long


The S&P will probably make a 6%+ correction in Q1 2018. When this happens, the S&P will fall below its 100 simple moving average for the first time in a very long time.
The S&P has been above its 100 daily moving average for 276 consecutive trading days as of December 13, 2017! Let’s look at the historical cases in which the S&P is above its 100 sma for at least 270 days. What does the S&P do next?
Here are the historical cases.

  1. February 6, 1996
  2. March 26, 1959
  3. November 12, 1954

Click here to download the data in Excel.

February 6, 1996

The S&P began a 6% “small correction” one week later on February 13.

March 26, 1959

The S&P began a significant correction 4 months later.

November 12, 1954

The S&P began a 6% correction 2 months later.

Conclusion

As you can see, this study supports the hypothesis that the S&P 500 will make a 6%+ “small correction” in Q1 2018. The S&P simply cannot go up much longer without making a small correction. As of October 2017, this is already the longest rally in history without a small correction.
Other studies also hint that the U.S. stock market will be much choppier in 2018 than in 2017.
Here are 2 studies demonstrating how similar  2017 is to 1964 and 1995 years are.

  1. Low volatility: Today, the S&P has gone 52 consecutive weeks without a 2% up or down movement (weekly close vs close).  This is the 2nd longest streak in history, and only 1964 was longer (79 consecutive weeks).
  2. Low volatility: the S&P has made 60 new daily all-time-highs YTD. Only 1995 (77 all time highs) and 1964 (65 all time highs) had more.

Both of these years were followed by a year of choppy markets that generally went higher.
My Medium-Long Term Model ignores small correction, so my portfolio is still 100% long UPRO (3x ETF for the S&P 500). But if you’re sitting on cash, now is not a good time to go long. Now is the time to be patient.

12 comments add yours

  1. Hi troy
    Good to have you back! May you recover 100%.
    Before we lost communication, I was waiting for a 6% correction. But I read somewhere that you went long UPRO in september(?). Could we have know this, that we had to go long UPRO, even without the 6% correction. Cause now I am hitting myself in the head, that I missed on 36% profit.
    Thanks for everything

    • I got lucky in a sense. I had no choice but to follow the long term due to my injury. It’s been a rough year for me, and this has been the one bright spot in my year.
      It’s ok. There will be a correction in the next few months. That is the time to get in.

  2. I can’t wait for the correction; I tend to trade 3x leveraged ETF’s as well, so entering the market now would be quite devastating for me.
    Is there a reason why you only trade UPRO, and not any other 3x?

    • My model is based on the S&P 500. So I have to trade a S&P ETF. UPRO is matches the S&P best (in terms of 3x). Volume is large, so getting in and out of a position isn’t a problem.

  3. Troy, if all the data is hinting to a 6% small correction why not side step that correction to save your portfolio a temporary drawdown and then reallocate your position after the 5% pullback. ?

    • What if SPX rises 7% before falling 6%? Although this is a low probability event, it still is a possibility.
      I think short term historical studies are less valid then they were in the past because there is too much capital in this world. Take Bitcoin as an example. Historically, most bubbles ended after 2 waves. Bitcoin has gone up in 5 waves
      Trends are becoming stronger because there is more dumb money than there was before. For example, china was never a force until the past ten yearsm. Chinese investors do not care about technicals at all. They rush into markets in a herd mentality. That’s why you have these ridiculous housing bubbles all over the world

  4. Troy,
    You happened to be spot on with your post yesterday about the s&p going down for a two week time frame after the fed announcement. The market traded down from 2675 to 2652 on the futures. I just could not commit to putting on a medium sized short position and getting stuck. So I broke even today. So according to your model this starts the two weeks leading into xmas for the s&p to have a multi 2 week drawdown then after xmas day the santa clause rally starts according to your statistical data but not leading up to the actual holiday itself?

    • That’s not my model. My model doesn’t make these short term predictions. The Santa Claus rally statistics is just a study that I did.

  5. Do you think with today’s downward pressure &’strong downwards close, that today could be the start to the 6% correction because of the momentum selling into the close?

    • There’s no way of knowing this. It’s impossible to guess the exact top, and trying to do so is futile. Bull markets have a natural bullish bias, so picking tops is a lot harder than picking bottoms.

  6. Since 1964 was longer (79 consecutive weeks). Vs the current 52 weeks that lasted longer with a 2% weekly range. Do u think this market can go another 27 weeks to tie or set a new record before the 6% small correction, which would mean another 6 months on a weekly range basis before the 6% occurs?

    • Maybe, but if I had to guess the odds, less than 25%.
      SPX had rallied more fiercely this year than in 1964. The magnitude of these rallies is not the same.

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