Pattern Similarity: 2000 and 2018

Bull markets are driven by fear, and powered by fundamentals. Bull markets end in euphoria, and weak fundamentals. Despite the uncomfortable ride the market experienced this week, our first sentence continues to describe the present situation.

The AAII bull sentiment had its largest one week drop since November 2017. 30.6% is not a euphoric level; no bull market has ever ended with bull sentiment below 50%.

Only 6% of companies have posted results for the quarter so far, but 86% of them reported positive surprises in their EPS, and the average earnings growth is +19.1%; no bull market has ever ended with such strong growth.

Although we knew corrections were inevitable, we were surprised by the sharpness of this week’s move. Maybe we should not have been so surprised since the steepness of the move matches the corrective trading pattern of 2000 labelled C4 in the two charts below.

CHART 1

CHART 2

The next two charts show the similar steep drop (blue oval) that marked the start of the C4 correction in 2000 and which may be replicating today.

CHART 3

CHART 4

If the SPX bounces up to the 2840–2850 zone, we will open some long put options on SPXL and long call options on UVXY in order to try and capture some of the downside of C4. If the market continues to sell off without sufficient bounce, we will start adding long positions around 2650.

Either way, we continue to regard this move as a correction within the on-going bull market, not the start of a new bear market. Both fear and fundamentals are too strong for the bull market to end.

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Pattern Similarity: 2000 and 2018 was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.

Source: Nicholas Gomez