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Does the Stock Market Need to Make a Pullback?

Stock-Markets / Stock Markets 2018 Feb 28, 2018 - 04:35 AM GMT

By: Troy_Bombardia

Stock-Markets

I expected the S&P 500 to make a short term pullback before rallying higher in the medium term. Hence the current rally’s intensity does surprise me a little. But I’m unfazed because 95% of my capital is traded via the Medium-Long Term Model, which ignores the short term.


Here’s today’s study.

After the S&P has made a 10%+ “small correction”, how common is it for the S&P  to rally without a pullback before making a new high?

Let’s take a look at the historical cases.

*We define these “pullbacks” as a 38.2% retracement of the rally.

2012

The S&P made a 10.9% “small correction”. It made a lot of 38.2% retracement pullbacks before making a new high.

2007

The S&P made an 11.9% “small correction”. It made 2 pullbacks before making a new high.

1999 and 2000

The S&P made a 13.1% “small correction” (1999) and 10.3% “small correction” (2000). The 1999 post-correction rally did not make a pullback before new highs.

1996 and 1997

The S&P made an 11% “small correction” in 1996 and a 10.2% “small correction” in 1997.

The 1996 case did see a pullback before new-highs. The 1997 case did not see a pullback before new-highs.

1990

The S&P made an 11.3% “small correction”. It made 2 pullbacks before making a new high.

1986

The S&P made a 10.2% “small correction”. It made a pullback before making a new high.

1967-1968

The S&P made an 11.7% “small correction”. It did not make a pullback before making new highs.

1965

The S&P made a 10.9% “small correction”. It made a pullback before making new highs.

1955

The S&P made a 10.5% “small correction”. The S&P made a 38.2% retracement pullback before making new highs.

1950

The S&P made a 14% “small correction”. It made a 38.2% retracement pullback before making new highs.

Conclusion

Making a 38.2% retracement pullback is likely from a statistical point of view, but it is not necessary. Hence, the U.S. stock market does not need to make a pullback right now before making new all-time highs. Pullbacks aren’t required.

The S&P 500 has already retraced more than 61.8% of the correction. Historically, pullbacks tend to occur before the S&P retraces 61.8%. This means that the odds of a pullback are now <50%.

Focus on the stock market’s medium-long term outlook, which is still decisively bullish.

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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