I explained why this isn’t the start of a bear market from a fundamental point of view. This also isn’t the start of a bear market from a technical point of view.
Volatility (VIX) was at its lowest level in this bull market just before the current “small correction” began. Historically, VIX rises months before a bull market ends.
Here’s VIX right now.
Contrast this with increasing volatility before the previous 2 bear markets (2007 and 2000).
Here’s VIX before the U.S. stock market topped in October 2007.
Here’s VIX before the U.S. stock market’s top in March 2000.
I don’t like to use VIX as a volatility indicator. VIX’s history is extremely limited. Here’s a simple way to gauge the stock market’s volatility.
How many 1% days (up or down) did the S&P have over the past 3 months (63 trading days)? Use today’s CLOSE vs yesterday’s CLOSE $.
Here are the number of 1% movements in the 3 months before each of the S&P’s previous bull market peaks:
- January 26, 2018 (the S&P’s top before the current correction): 1
- October 11, 2007: 24
- March 24, 2000: 28
- January 10, 1973: 4
- December 2, 1968: 7
As you can see, it’s not normal for the S&P to have almost no 1% movements just before a bull market tops. The one single 1% movement in the 3 months leading up to January 26, 2018 happened on the day of January 26, 2018. In other words, the S&P broke its record streak of no 1% movements with a 1% surge on January 26.
Here are the historical cases in detail.
October 11, 2007
March 24, 2000
January 10, 1973
December 2, 1968
Bull market peaks are preceded by at least a little volatility. This is because momentum must weaken before a bull market can end. Bull markets don’t top on insanely overbought momentum.
The U.S. stock market’s complete lack of volatility before this correction implies that the current correction will not turn into a bear market. The “buy the dip” mentality is sill strong enough to push the S&P 500 to new highs.
Read The stock market today is not like 2007 or 1987