The current bull market that began in March 2009 has been one of the longest and steadiest on record with a 311% gain and volatility falling to record lows, as represented by the VIX bottoming at 8.56 on November 24, 2017. In addition, the DJIA went a record 403 days without a 5% pullback, gaining 56% from June 2016 to January 2018. Currently, the U.S. equity markets have entered a corrective phase. Historically, when a part of a longer bull market cycle, corrections average an 8% loss and last 22 trading days.
However, using our disciplined O’Neil Methodology, instead of trying to predict whether the bull market will resume or correct further, we prefer to take our signals from the markets’ technical and quantitative results. Presently, we have the U.S. equity markets rated Downtrend after the S&P 500 violated its 21-DMA on February 2 and its 50-DMA on February 5; the S&P 500, the Nasdaq, and the DJIA are now sitting -10.1%, -9.7%, and -10.4% off all-time highs, respectively. Therefore, the rapid damage done to U.S. markets is already at above average correction levels. If we undercut the 200-DMA on either the S&P 500 (2,538) or Nasdaq (6,553), we will become even more bearish.
With today’s break of Tuesday’s intraday lows, U.S. markets are back in a Downtrend (from Rally Attempt). We now need to see new lows followed by three days off the lows and a follow-through day where the index rises at least +1.7% on volume higher than the prior day to move the market back into a Confirmed Uptrend. We would caution investors that while the U.S. corporate profit cycle is strong aided by an improving global economy, a weak dollar helping exports, and lower corporate tax rates from the recently passed legislation, previous corrective cycles have resolved themselves over weeks not days. As a result, we believe being patient and sticking to our time-tested O’Neil Methodology is the right course of action.
If this is simply a correction within a longer bull market, further gains may be ahead. This was in the case in the 1996 correction of the longest ever 1987–2000 bull market, as demonstrated on pg. 5. That market took over four months to consolidate from February 1996 to August 1996, as seen on pg. 11. After that consolidation, the U.S. equity markets rose until January 2000. Similarities from that period to the current one include record-setting rallies with no 5% correction ( p.4 ), and one-year or longer consolidations within an existing bull, followed by a breakout ( p. 4 ).
