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.
- April 1954
- October 1958
- July 1964
- November 1980
- March 1983
- July 1995
- June 1996
- January 2007
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!
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%).
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.
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).
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).
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%).
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.
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:
- 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.
- 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.