I thought the stock market was supposed to “crash like 1987”

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by Troy

It seems like just yesterday when everybody on CNBC was saying “here’s why the stock market could crash like 1987”.

With that being said, the S&P has made a perfect 61.8% retracement of its current correction. We predicted over the past 2 weeks:

Even if this is the start of a bear market, the S&P will bounce and retrace 50-61.8% of its decline. Bear markets don’t go down in a straight line.

If this is a bull market’s correction (much more likely scenario), the S&P will bounce to 50-61.8%, make a short term pullback, and then rally higher.

 

We are sticking to the bull market case right now.

Let’s determine the stock market’s most probable 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, week, or month.

*Probability ≠ certainty.

Big gap up

The S&P 500 made a big gap up yesterday.

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Conventional technical analysis sees such big gap ups as “bear market symptoms”. That is factually incorrect.

Here’s what happened next to the S&P 500 when today’s daily LOW is more than 0.5% above yesterday’s daily HIGH.

*Data from 1962 – present

As you can see, the stock market tends to do well 6-9 months later. None of these cases occurred in a bear market.

Why?

Because while bear markets often see big gap ups on the opening bell, a lot of these gaps are immediately filled by massive intraday swings.

Breadth’s rapid recovery

The S&P 500’s breadth has made a rapid recovery.

The % of stocks above their 200 dma has reversed, along with the stock market itself.

Here’s what happened next to the S&P 500 when the % of stocks above their 200 dma went from below 35% to above 50% in less than 2 weeks.

*Data from 2004 – present

While the data is limited, you can see that the S&P tends to do well over the next 2 months.

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VIX’s roundtrip

VIX has made a roundtrip. It spiked, and is now falling.

Here’s what happened next to VIX when it spiked above 25 and then fell below 17 in less than 3 weeks (i.e. right now)

As you can see, volatility usually continues to fall.

*Volatility and the stock market move in the opposite direction.

Click here to see yesterday’s market study

Conclusion

Our discretionary technical outlook remains the same:

  1. The current bull market will peak sometime in Q2 2019.
  2. The medium term remains bullish (i.e. trend for the next 6-9 months).
  3. The short term is slightly bearish. There’s a slightly >50% chance that the S&P will fall in the next 1-2 weeks. This probability isn’t exceptionally high, so I wouldn’t bank on it.

Focus on the medium term and long term. The short term is usually just noise.

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