Markowski: Sentiment Anomalies & Market Downturns

by Lance Roberts

Market Sentiment Anomalies And Historical Market Downturns.

The two stock market sentiment anomalies have increased the probability of a correction near term.

The two anomalies are:

  • Thanksgiving Melt Up Anomaly. The average S&P 500 gain for 12 of the past 14 ten-day periods concluding November, was 3.5%. The only two exceptions, 2015 and 2018, were preceded by significant market corrections.
  • Bullish Sentiment Anomaly. Currently, there is a high probability for the S&P 500 to decline by 12.7%. Such would be from its recent 2020 high and would conclude by December 20, 2020. Based on the previous behavior, there is a 66% probability the S&P 500 could continue its decline in 2021.

The Thanksgiving Melt Up Anomaly is now driving the S&P 500 to a higher November all-time high.

The Bullish Sentiment Anomaly is the cause of a violent correction for the S&P 500 to begin in early December 2020.

The chart below depicts the four 45% to 59% Bullish sentiment readings which occurred near the all-time highs for the S&P 500. (2018 to November 13, 2020)

Sentiment Anomalies Market Downturns, Markowski: Sentiment Anomalies & Market Downturns

Looking For A Short-Term Decline

Within five weeks of the three prior Bullish Sentiment Anomalies occurring, the S&P 500 declined by a minimum of 9.7%. Two of the three total declines depicted in the table below were more than 100% greater than the five-week drops.

Sentiment Anomalies Market Downturns, Markowski: Sentiment Anomalies & Market Downturns

There exists a risk of decline from November 13, 2020, through Christmas Day. Such is likely to occur precisely because no one expects it to.

Trade accordingly.

 

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