The two stock market sentiment anomalies have increased the probability of a correction near term.
The two anomalies are:
- Thanksgiving Melt Up Anomaly. The average S&P 500 gain for 12 of the past 14 ten-day periods concluding November, was 3.5%. The only two exceptions, 2015 and 2018, were preceded by significant market corrections.
- Bullish Sentiment Anomaly. Currently, there is a high probability for the S&P 500 to decline by 12.7%. Such would be from its recent 2020 high and would conclude by December 20, 2020. Based on the previous behavior, there is a 66% probability the S&P 500 could continue its decline in 2021.
The Thanksgiving Melt Up Anomaly is now driving the S&P 500 to a higher November all-time high.
The Bullish Sentiment Anomaly is the cause of a violent correction for the S&P 500 to begin in early December 2020.
The chart below depicts the four 45% to 59% Bullish sentiment readings which occurred near the all-time highs for the S&P 500. (2018 to November 13, 2020)
Looking For A Short-Term Decline
Within five weeks of the three prior Bullish Sentiment Anomalies occurring, the S&P 500 declined by a minimum of 9.7%. Two of the three total declines depicted in the table below were more than 100% greater than the five-week drops.
There exists a risk of decline from November 13, 2020, through Christmas Day. Such is likely to occur precisely because no one expects it to.
Trade accordingly.
