What will the S&P 500 do after rising 8 months in a row?


2017 has been a year of remarkably low volatility for the U.S. stock market. By many measures, only 1964 and 1995 are similar to 2017 in terms of volatility.
The S&P has gone up 8 months in a row as of November 2017 (using the monthly CLOSE price). Historically speaking, what does this mean for the U.S. stock market over the next year? Let’s examine the historical cases.

  1. April 1954
  2. October 1958
  3. July 1964
  4. November 1980
  5. March 1983
  6. July 1995
  7. June 1996
  8. January 2007

April 1954

The S&P 500 continued to rally very steadily for the next 11 months. The next 6%+ small correction (6.8%) began in March 1955.
The next “significant correction” (as defined by my model) began in August 1956, more than 2 years later!

October 1958

There was no 6%+ “small correction” between the time this signal came out and the next significant correction. The next “significant correction” began 9 months later in August 1959 (13.73%).

July 1964

The next small correction began 9 months later on May 13, 1965 (10.9%). The next significant correction began 1.5 years later in February 1966.

November 1980

This historical case does not apply to the present at all.
The S&P made a quick “significant correction” in February-March 1980 because the U.S. economy went into a recession. Then the S&P rallied hard for 8 months before the wheels came off the economy again (double dip recession). The S&P began a significant correction in November 1980.
Today, the U.S. economy is insanely healthy and there are no fundamental recession signs at all. (More on the U.S. economy in a later post).

March 1983

After a long 2 year recession and a significant correction, the S&P soared. After this signal came out, the S&P’s next “small correction” began on June 22, 1983 (7.6%). The next significant correction began 5 months later on October 10, 1983 (14.7% decline).

July 1995

The next “small correction” began 6 months later on February 13, 1996 (6%). The next significant correction began in July 1998. There were many “small corrections” in 1996 and 1997 (some of which were 10, 11%).

June 1996

The S&P was already in the beginning of a 11% “small correction”. The S&P tanked for 2 weeks as soon as July 1996 began.

January 2007

The S&P began a 6.6% “small correction” on February 22, 2007. A bear market began in October 2007.

What these historical cases imply

We can draw 2 conclusions from this study:

  1. The next significant correction is at least 5 months down the road (approximately). This coincides with my model, which does not foresee the start of a significant correction in the next few months.
  2. 2018 will be significantly more volatile than 2017, with multiple “small corrections” and pullbacks.

The first conclusion is logical. When a market’s momentum is insanely strong, such strong momentum does not die without a fight (i.e. a significant correction doesn’t begin right away). The market’s bullish momentum needs to weaken via pullbacks/small corrections before a significant correction can begin.

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