How much more can the stock market fall in the short term

Sharing is Caring!

by Troy

With the stock market down approximately 3% from its all-time high, this is the first pullback of 2019. The short term is quite hard to predict right now given that news can drive the market in either way, but here’s a look at several short term factors.

Go here to understand our fundamentals-driven long term outlook.

Let’s determine the stock market’s most probable medium term direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day.

Terrible start to May

Remember “sell in May and go away”? While the stock market performs worse from May – October than November – April, the probability of the stock market falling from May – October is 50/50. So “Sell in May and go away” doesn’t always work.

But when it does work, watch out.

The past 6 days have been one of the worst starts to May, with the S&P down more than -2.2%.

Such a quick decline in the first 6 days of May has only happened 5 other times from 1950 – present, and all of them saw more selling over the next 1-2 weeks.

What if we loosen the parameters to increase the sample size? Here’s what happens next to the S&P when it falls more than -1.5% in the first 6 days of May.

We can loosen the parameters even more.

Overall, seasonality is a short term bearish factor for stocks. While this is mostly bullish for the S&P 9-12 months later, I wouldn’t quite use 6 days to predict 1 year forward returns.

*Seasonality factors are of tertiary importance

VIX backwardation

VIX has been in backwardation for the 2nd day in a row, as Urban Carmel noted.

*VIX backwardation = when future VIX contracts are cheaper than present VIX contracts (volatility is expected to fall). This is rare, because future VIX contracts are usually more expensive than present VIX contracts (volatility is expected to rise).

From VIXCentral:

Here’s what happens next to the S&P when VIX is in backwardation for 2 days in a row.

Here’s what happens next to VIX

This is more consistently short term bearish for VIX than it is short term bullish for the S&P. Of course, this doesn’t mean that VIX can’t go up another day or two, especially in such a news driven market.

VIX itself

VIX has now been above 15 for 3 days in a row, for the first time in 2 months. Seems like VIX is breaking out from a very low level.

Historically, this was mostly bullish for the S&P 2 weeks later.

And once again, mostly bearish for VIX on every time frame.


The Put/Call ratio spiked today for the first time since early-January.

Instead of looking at the Put/Call ratio’s absolute value, we should look at its distance from its 200 dma because the Put/Call ratio’s average shifts over time.

Here’s what happens next to the S&P when the Put/Call ratio is more than 20% above its 200 dma, for the first time in 3 months.

Slightly bearish over the next week, after which forward returns improve.

You can see a pattern here. Among the previous 3 market stats, it seems that the S&P tends to fall a little more before bottoming soon.

Short term uptrend is over

A few days ago we talked about the S&P’s 20 day moving average going up nonstop, and how this would probably end soon.

With yesterday’s selloff, the streak is over.

When such long short term uptrends ended, the S&P usually made a normal pullback (as opposed to a big correction) and then pushed higher over the next month.


Instead of looking at the % of S&P stocks above their 50 dma, we can look at the % of S&P stocks above their 50 ema. The figures are similar, but StockCharts has more data for the 50 ema.

Short term breadth is falling…

Because the S&P itself is approaching its 50 ema.

Here’s what happens next to the S&P when the % of S&P stocks above their 50 ema falls below 56%, for the first time in 3 months.

Mostly bullish 1 month later.

What if we loosen the study’s parameters to increase the sample size?

Here’s what happens next to the S&P when the % of S&P stocks above their 50 ema falls below 56%, for the first time in 2 months.

Once again, there’s a bullish lean over the next 1 month.

Oil’s golden cross

Oil made a golden cross today, whereby its 50 dma closed above its 200 dma

This was mostly random for oil on all-time frames…

And this was mostly random for the S&P in the short term, but bullish 9-12 months later.

Shiller P/E ratio

The Shiller P/E ratio has been above 20 for 91 consecutive months, a streak only rivaled by the dot-com bubble. (By the time the dot-com bubble matched 91 consecutive months, it was already September 2002, after the stock market had crashed.)

This is quite the streak, because the Shiller P/E used to consistently peak at around 20

This demonstrates that while valuations are important, they aren’t the be all and end all that many investors think. There’s much more to fundamentals than just valuations.

Read Volatility spiked, stocks tanked. What’s next 

We don’t use our discretionary outlook for trading. We use our quantitative trading models because they are end-to-end systems that tell you how to trade ALL THE TIME, even when our discretionary outlook is mixed. When our discretionary outlook conflicts with our models, we always follow our models.


Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimistic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (e.g. next 6-9 months) has a bullish lean.
  3. We don’t predict the short term because the short term is always extremely random, no matter how much conviction you think you have. Focus on the medium-long term.

Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.


Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.