I didn’t write about the stock market for a while now and there is a good reason for that, there is nothing new – the market is still in a bull trend. So far there is little evidence to suggest this bull run is ending, but on the other hand I’m sure you’ve heard about the quote ‘risk happens fast’. So everyone is probably wondering what to do going forward.
In this post let me show you the pattern of the years that end with 7 as well as why this market is so similar to the market in 1995.
The last two weeks were one of the most quiet 10 day periods in the S&P 500 with the standard deviation of daily price close changes at the record low levels.
— Domen Butala (@DomenButala) August 7, 2017
Not only that, but also:
— Domen Butala (@DomenButala) August 6, 2017
The year still has almost 5 more months to go, doesn’t it? On one hand, quiet periods can last longer than people tend to expect, but on the other a median correction on a high to low basis was almost 12% while we got a correction of just below 9% in 3 out of 4 years.
I am not calling for THE top, but to get a feeling what to expect on the down side if or when we get a correction (not only a dip of 1% or so), let us assume that 1995 doesn’t repeat. And don’t be mistaken, we will see a correction at some stage going forward.
If we get a correction of around 12% this would take us, taking today’s S&P high at 2490, to around 2200 level. This is very close to the November 2016 break out point level. On the other hand if the price corrects to 200 day moving average, which is at 2316 today or approximately 7% lower, this takes us closer to the 75% likelihood case mentioned above.
A scenario like this would coincide well with the ‘years that end with 7’ pattern. Let me show you the next chart provided by Hedge Fund Telemetry. We see that the market had a correction in the 2nd half of the year after a period of low volatility and nice up trends; except the correction part pretty similar to this year so far.
Except 2007 the years that followed did not have a recession. So, if we get a similar type of a correction, would this end the bull run we are in right now? Technically speaking while the market stays above the 200 day moving average or in the case of a bigger correction above last November’s break out point I think there is no reason to believe the major (or even secular as some people are suggesting) bull run is ending.
Of course, from the short-term perspective it would be nicer to see a rather smaller correction as this would suggest that the market is very strong at the moment. But from the longer term perspective it could be healthier to see a ‘median size’ correction with a retest of the breakout point last November. Should the price correct by more than that, I think we should get very worried from the longer term perspective. Let’s see how this plays out, but I will keep you updated should anything change.