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.
- February 6, 1996
- March 26, 1959
- 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.
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.
- 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).
- 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.