Bull market rallies and bear market declines are heavily influenced by market psychology or crowd behavior. The collective herding of market participants can often escalate into extreme and wild moves in stock prices. Most stock markets bubbles in the past are the direct result of excessive greed or panic buying in the marketplace. On the other hand, many stock markets crashes and major bear declines are caused by extreme fear or panic selling. These extreme market conditions are very difficult to forecast with accuracies until it has already occurred. Nonetheless, it is important for investors and traders to understand that stock market rallies don’t go up forever and bear declines do not go down forever.
Main Street and Wall Street have recently turned decisively bullish as many of the bulls have raised SPX targets to 3,400-3,500 for 2020. We would like to reiterate where we stand regarding the US stock market call for 2020. For the past few months we have projected SPX can trend upwards to 3,653-3,740 during 2020. This is based primarily on the numerous technical breakouts that occurred during 2019 including the 2-year broadening top/bottom breakout and/or 2-year head/shoulders bottom.
However, we have alluded to the fact that we suspect a market melt-up scenario in the US stock market is likely to develop into this rally. Under this scenario, SPX and other key US stock indexes can overshoot their technical projections and rally upwards to as high as 4,000+ (SPX) before the next major correction (15-20% plus) and/or extensive trading range scenario (technical base).
So, the next question then becomes – when will SPX achieve its forecasts? Under a melt-up market scenario, it is reasonable to expect the bullish targets will be achieved very quickly possibly as early as the first half of 2020 before the US Presidential Election. We would also like to again reiterate our technical call the current 2-year technical breakout (2018-2019) is eerily like that of the 2015-2016 technical base breakout.
The prior breakout in late-2016 quickly exceeded its technical targets in a short 1-year timeframe, rallying 679 points or nearly 30.95% from its 2016 breakout level. In fact, from its Nov 2016 reaction low of 2,083.79 it rallied 789.08 points gaining 37.87% before transitioning into the recent 2018-2019 technical base.
If SPX replicates the prior breakout scenario of 30.95%/37.87% rallies from the late-2019 breakout above 3,059 and from Oct 2019 reaction low of 2,855.94 then this would imply SPX targets of 4,006 and 3,937.5, respectively. This SPX target appears to be optimistic given the strong rally from last year. However, from today's SPX close of 3,253 this would be another 22.96%, a reasonable rally if a melt-up phase occurs during 2020.