After increasing by 15.5% between February 3rd, 2014 and September 18th, 2014, the U.S stock market began to decline on September 19th and during the following four weeks. The S&P 500 price index fell by 7.4% during that period and stood on October 15th at its lowest level in six months. This was the fourteenth correction of the index since the start of the current bull market in April 2009 (Figure 1). The decline was followed by a strong rebound during the past three weeks. On November 6th, the S&P 500 price index closed at a new all-time high of 2031.21 and stood 9.1% above the trough of mid-October.
In December 2010, the Forecasting Advisor began to calculate in real-time the probability for the S&P 500 stock price index of entering a bear market phase with its proprietary stock market cycle model. (A description of the model and its historical forecasting performance can be obtained free from this hyperlink: http://www.theforecastingadvisor.com/background-papers.php). In practice, this means that at the start of each month the probability of entering a bear market was calculated for the current month and the subsequent month.
There have been eleven corrections of the S&P 500 price index since the launch, in December 2010, of the calculation of the real-time probabilities of entering a bear market. As shown in Table 1, the probabilities calculated prior to, at the beginning, and during each correction of the stock price index have always been well below 50% (the threshold to signal a bear market). In other words, prior to, at the beginning, and during each correction, the model predicted that the S&P 500 price index would not shift in a bear market. The predictions turned out to be right as all the corrections were spread over a few months at the most and were followed by a strong rebound in the stock price index, which reached new bull market highs.
In conclusion, the probabilities of entering a bear market will continue to provide unique and insightful intelligence at a time when economists and financial analysts are expecting U.S. interest rates to rise.
Near-Term Outlook for the U.S. Stock Market Cycle
The Forecasting Advisor stock market cycle model is used here to assess the risk for the U.S. stock market of entering a bear market in the next two months. More specifically, the model provides the probability for the S&P 500 price index of being a bear market for the months of November and December.
As shown in Figure 2, the probabilities of being a bear market are at zero per cent for November and December. This means that this bull market will extend into the early New Year.
© Robert Lamy, The Forecasting Advisor.
