Market Corrections: Did You Miss The Big One?

If you are as old as dirt like me then you remember seeing this same scene in every show. It is kind of fitting to the current stock market as there are recurring top pickers or calls for a big correction nearly every day. We may see a correction, maybe even ‘The Big One’ as there has not been one in the S&P 500 for over 6 months. But there also is precedent for a continued run higher. My friend Ryan Detrick at Schaeffer’s shared some great nuggets with us Monday from their research.

Seriously, 10 out of 10 times after a 6 month move higher it is up 12 months later. Ok that is not a guarantee, but what if the small pullback bottom on April 19th was ‘The Big One’? Take a look at the chart below. It shows the Bullish Percentage Index (BPNYA) overlayed against the S&P 500 (SPY) for the past 18 months. What is interesting about it is that there are two distinct corrections marked #1 and #2. The first characterized from the BPNYA moving from extreme overbought in February 2012 to extreme oversold in June 2012. At the same time the SPY sold off just over 10%. This was a deep correction for the BPNYA of over 40% and coincided with a sizable market correction.

The second saw the BPNYA pullback about 20% from its overbought high to the oversold low. This one only saw only a 7% pullback. The current market has gone through another cycle since then and the BPNYA has pulled back only about 15% peak to trough. It could still turn lower, like it did in May 2012, but it could also continue on its next wave higher, with the bottom in. If it does notice that each of the prior two legs have been about 15% higher for the S&P 500. You may be preparing for a pullback. But are you also ready for S&P 1776?

Disclosure: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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