Here’s the most notable part of the current correction:
The stock market INSTANTLY reversed from “risk on” mode to “risk off mode”.
The stock market was soaring before it made an extremely rapid “small correction”. Historically, this has been a very bullish setup. Here’s the study: what happens when…
- The S&P rallied at least 4% in the past 2 months, and…
- Made a new 1 year high in those 2 months, and…
- Wiped out all the gains in just 7 days.
Here are the historical cases:
- February 5, 2018
- January 26, 2010
- February 16, 1993
- September 15, 1986
- October 16, 1979
- October 3, 1955
- December 4, 1950
Here are the historical cases in detail.
January 26, 2010
This was a 9.2% “small correctoin”. The S&P made a new high in March 2010.
February 16, 1993
This did not even occur during a 6%+ “small correction”. This occurred during a pullback. This historical case does not apply to today because the S&P has already made a 10.1% “small correction”.
September 15, 1986
This signal came out during a 10.2% “small correction” (very similar to today). The S&P made a new all-time high in December 1986.
October 16, 1979
This signal came out in the middle of an 11.6% “small correction”. The S&P made a new high in January 1980.
October 3, 1955
This signal came out in the middle of a 10.5% “small correction”. The S&P recovered all of its losses by November 1955.
December 4, 1950
This happened during a 6.5% “small correction”. The S&P made a new high just a few weeks later.
This is the most important conclusion:
The S&P 500 will not make a “significant correction”. This is just a “small correction” that most likely will not exceed 12%.
This conclusion is logical. When the stock market rises more than 4% in 2 months and makes a 1 year high, its’ momentum/sentiment is very high. Markets don’t die i.e. (make a significant correction) when momentum is extremely high. Markets die after momentum has weakened.
When momentum is very strong and the stock market makes a correction, the “buy the dip” mentality is strong enough to push stocks to new highs. The “buy the dip” mentality prevents the “small correction” from turning into a “significant correction”.
I do not expect the current correction to turn into a “significant correction”. The Medium-Long Term Model does not state that this is a “significant correction”. The model has failed to predict 3 significant corrections since 1950, and I don’t think the current case will turn out to be a failure.
There’s another important conclusion from this study:
The stock market will probably swing sideways or fall a little more over the next 1-2 weeks.
Keep in the mind that this signal came out on Monday. The S&P has already made a marginal new low since then.