Stock Market Correction Over?

We launched our firm, HX Research, during an interesting time in the stock market.

After a tough 2022, the stock market bottomed in October of that year, and – after consolidating for some time – it began to climb higher through most of 2023.

It got significantly extended into July 2023 and then had a nasty three-month correction but bottomed again in October (!) and began to climb higher.

Again, it began to get very extended and stayed elevated from the 50-day moving average from November until mid-March. This is when we started to call for a correction.

Here is a chart of the stock market (the S&P 500) across the period we are discussing…

You can read the note we wrote about the pending correction on March 21 here.

The stock market correction played out as expected.

After being extended for so long (six months), we felt that we would need to see it go below the moving averages, which is precisely what it did.

From peak to trough, the stock market corrected some -5.5%. This is about average for a minor correction in a bull market.

Has the stock market really bottomed?

We are fans of a particular type of technical analysis. 

Remember, "technical analysis" is the study of price and data patterns that may give us an insight into what is most likely to happen next.

The particular type of technical analysis study we like to see is when we have a concurrence of rare events in the stock market.

Think of "A, B, and C just happened, and this has only happened X times before." Then you look at what happened next…

Our experience of finding these rare occurrences and them producing very high probability forward bets has been outstanding.

Here is a recent post from great technical analyst Frank Cappelleri of CappThesis…

He shows that the last few times we had a correction and bounced out of it with a three-week gain of at least +5%; the bottom was finally in. We think he is spot on!

What happens from here?

We also recently saw this post on X/Twitter from technical analyst Steve Deppe…

The graphic is hard to read, but here is a larger version…

Steve's note points out that IF the stock market finishes the month of May at a new all-time high and is more than +10% year-to-date, then the forward returns on the stock market are quite strong.

As with many strong markets that are hitting all-time highs, the very near-term probability of the stock market moving higher is only ok. He shows that one month and two months forward, they are 66.6% and 77.8%. Those are good odds but are similar to the stock market overall.

When you go out further, though, the odds get much better. Once you look five months to ten months out, the stock market has been higher 88.9% and 100% of the time.

Many of you might look at this and think of it as "voodoo ." Isn't past performance not an indicator of future performance?

Not in technical analysis! Patterns repeat themselves, and they are powerful.

We spent much time on the powerful (and BULLISH) technical patterns shown in the stock market in this note from early April.

Across our thirty-year career, we have had great success following this kind of data, and we think it will play out again.

Does that mean the stock market returns to a new high in the coming weeks?

Maybe. We think it is just as likely that it consolidates around these new highs and continues to churn as we burn off the excess optimism built up over the start of the year.

The (brief) revival of the meme stocks also shows us that some powerful speculative undercurrents are still in the market. The fact that the revival only lasted a WEEK, though, tells us that the underpinnings of the BULL MARKET are pretty solid.

We think that we will continue to churn higher for the rest of the year and that the 2024 BULL MARKET will remain in place!

Tell us more about where you think the stock market ends by year-end. Share your thoughts in the comments section online or email us at [email protected].