The S&P 500 closed below its 200 daily moving average for the first time in 442 trading days yesterday. This is actually a medium-long term bullish sign for the U.S. stock market.
This means that the S&P 500’s trend was insanely strong from the second half of 2016 to January 2018. When the market’s trend was insanely strong and subsequently makes a “small correction”, that “small correction” doesn’t turn into a bear market.
Here’s what happens next when the S&P is above its 200 daily moving average for more than 400 trading days.
- January 29, 2018 (current case)
- June 23, 2014
- February 27, 1998
- June 27, 1955
- March 7, 1952
June 23, 2014
The stock market’s next correction was a 9.8% “small correction”. The next “significant correction” began 11 months later in May 2015. There was no bear market.
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February 27, 1998
The stock market’s next 22.4% “significant correction” began 5 months later in July 1998. To use this analogue, 5 months after January 29, 2018 is June 29, 2018. The 1998 “significant correction” did not turn into a bear market. The bull market topped in March 2000.
June 27, 1955
The S&P’s next correction was a 10.5% “small correction” that began 3 months later in September. The next 21.4% “significant correction” began more than 1 year later in August 1956. There was no bear market.
March 7, 1952
The next correction was a 6.8% “small correction” that began 5 months later in August. The next 14.8% “small correction” began 9 months later in January 1953. There was no bear market.
This study suggests that the stock market’s current decline isn’t the start of a bear market.
The stock market doesn’t just die into a bear market when its previous trend was insanely strong (e.g. in 2017). The last big rally in a bull market see bearish divergences and increases in volatility, neither of which were present in the 2017 rally.
We are in the process of making these bearish divergences. The S&P 500 will make a new all-time high before this bull market ends, but momentum and breadth won’t.
The stock market’s recent volatility is normal for the last 1-2 years of a bull market. The first breakdown below the 200 daily moving average in a long time isn’t the start of a bear market.
This supports previous studies that we did in January:
- Study: do bull market tops need breadth divergences
- Study: what happens when RSI > 80 on every single time frame