Investors are scared. I’m scared. The anxiety levels in the country are reaching all-time highs because the stock market rally is about to happen.
I’m sorry folks, but that’s the way the markets work … most of the time at least. Yes, maybe this time is different. In general, however, the markets just don’t do what most people anticipate they will do and I’m seeing more and more signs of a significant rally ahead.
As for market sentiment, the CNN Money Fear & Greed Index tells the current story. Investors are terrified.
That fear level has been driven in part by a very rare pattern in the S&P 500 – eight consecutive down days in a row. There have only been six occurrences of this pattern since 1978. It sounds scary, doesn’t it?
As usual, the implications are not what you might think.
Here’s the trade: Buy the S&P 500 after a drop of 8 consecutive days and sell at the end of 145 trading days (about 7 months). One way to do this would be to buy SPY, the ETF for the S&P 500. What makes this trade so special?
Here’s a chart of what happens to the S&P 500 after an 8 day losing streak. As I mentioned earlier, it has only happened 6 times since 1978 and five of these trades were profitable.
The average gain for these six trades was +12.5%. Even taking out the stunning 46% gain in 1982, the average gain is still a very respectable +5.77%.
My research team looked back at a day-by-day result of this trade. It shows that there is an 87.5% chance to make between 5% and 13% by holding the trade between 70-170 business days.
While the naysayers are wrapped up in the negative emotions surrounding the market, I’m looking at the facts. And the fact is that in spite of the 8 day losing streak, the S&P 500 hasn’t even hit the SSI Yellow Zone yet.
That’s the power of understanding that the current market correction is well within the bounds of the expected market volatility. We can tune out the noise.
As of yesterday’s close, the SPX is still almost 2% above the Yellow Zone and 6% above the Red Zone and the SSI Stop signal.
The volume-at-price chart that I like is also showing that there is very strong support halfway between the SSI Yellow Zone and the SSI Red Zone.
Another factor that is working in favor of this long trade in the S&P 500 is the Commitment of Traders Chart. Notice what happened right before the Brexit event in late June? The Commercial Hedgers (the so-called “smart money”) open interest was rising and almost all of the newly-opened positions were bullish. It looks like the same thing is happening in the most recent report.
And my composite time-cycle charts are showing that this near-term weakness in the S&P 500 should end next week and begin moving higher into December.
We know that every trade has risk. Don’t let the cacophony of negativity make the decisions for you.
Trading the facts, not the noise,
