Stock Market’s Price Action Favors Short Term Bulls

The S&P 500 has faced some short term weakness recently, falling for 4 consecutive days after making an all-time high.

These quick “reverse downs” are common. They’ve happened 53 times from 1950-present.

Here are the historical cases from 1990 – present, and what happened next to the S&P 500.

Here’s the most important point: these “instant reverse downs” don’t happen immediately before a bull market tops. They happen at least 5 months before bull markets top.

This didn’t happen at all before the October 2007 bull market top.

This happened in April 1999, 11 months before the March 2000 bull market top.

This didn’t happen at all during the 1970-1972 bull market.

This happened in June 1968, 5 months before the December 1968 bull market top.

So while we are in the late stages of this bull market, the bull market isn’t over yet.

Moreover, you can see that this it typically marks a short term bottom in the stock market. (See 1 week forward returns)

Moral of the story: the stock market’s short term isn’t necessarily bullish right now, because the short term is rarely more than a 50-50 bet. However, if you hold a short position right now, please exercise caution.

Lastly, let’s talk about FAANG. Facebook made a “death cross” recently. (“Death cross” is when the market’s 50 dma falls below its 200 dma).