Will 2013 Break A 16-year Recurring Pattern in Stocks?


A few nights ago I found something “strange”…

I was looking through some charts of the stock market going back several years and decades back to the 1990s.

I find this exercise both relaxing and stimulating as it trains my brain to spot patterns that repeat themselves. Spotting reliable patterns also means spotting potential opportunities.

During one such exercise, I found a chart which suddenly made me stop… I took a closer look and then I found an “odd” pattern.

I was looking at a chart of one of my favourite indexes for measuring “overbought” and “oversold” conditions in the stock market: the Bullish Percent Index (see chart below).

The Bullish Percent Index generates reliable “buy signals” for stocks when it falls below the 50% and the 25% line.

Take a look at this chart of the Bullish Percent index from 1997 to 2013, and see if you can spot the same recurring pattern that I saw:

Bullish Percent Index 1997-2013

You will notice that every year since 1997 the bullish percent index has tested or come very close to the 50% level (shown in red).

Every year EXCEPT 2013…

Now, you may think “so what?”.

Well, the fact is that every time that the bullish percent index has tested the 50% level, this has also coincided with a significant correction or sell-off in stocks.

Take a look at this chart of the S&P 500 from 1997 to 2013:

S&P 500 from 1997 to 2013

Every major drop that you see occurring in the stock market each year has coincided with a fall in the bullish percent index to test its 50% level.

Of course, during the bear markets of 2001-2003, and 2008-2009 the bullish percent index went BELOW 15%. However, these mammoth size crashes are normally buy opportunities.

Notice that although in 2005 we had a sell-off in the spring of that year, the bullish percent index did not exactly “touch” its 50% level. However, it came extremely close.

The only exception to this 16-year pattern is this year, 2013…

So far this year we have not yet tested the 50% level – not even once! (see below chart):

S&P 500 and bullish percent index

The black line (above) is the bullish percent index which is superimposed over the S&P 500 (grey line). The last time we tested the 50% level was May/June 2012. The stock market had a 10% correction back then, and that also was a great buy opportunity.

So if this pattern repeats – and that is an IF – then we should expect to see another significant correction in the stock markets between now and December.

Perhaps the “debt ceiling” this October could be a trigger. Who knows?

Now I will admit to you 3 things:

Firstly, the evidence going back only 16 years is pretty slim. I don’t have charts of the bullish percent index past 1997. However, I still think that a 16-year recurring pattern is worth paying attention to.

Secondly, you could also argue that because stocks are in a “bubble”, we should not expect a big correction this year. But I would disagree. Notice that during the 2 biggest bubbles of the last 16 years (the dot-com and the housing bubble) we still tested the 50% level.

Finally and importantly:

November to May has historically been a positive and bullish period for stocks. So if we are going to see any major sell-off this year, it should be soon and BEFORE the end of November…

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Alessio Rastani is a stock market trader at www.LeadingTrader.com


  1. I see it. A massive divergence between the S&P500 and the bullish percent index that develops from march 2013. By july the divergence gap is obvious and is signifying a steep downward correction of the S&P. That may not happen by the way because of the same obvious reason which created the divergence back in march 2013. That is the QE unlimited funds being used to prop up the stock market. I think the US stock market is hooked and addicted now to Quantitative Easing funding. Just like with the sovereign bonds,they wont be able to turn it off without the markets throwing a wobbly.
    Excellent article .. really brilliant research Alessio. I love these posts of yours.
    regards Senan

  2. Interesting, I bet alot of people sitting around expecting THAT correction.. :/


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