Our long term S&P 500 model states that the U.S. stock market is not in a bear market. We define “bear markets” as declines that exceed 33.33% and last more than 1 year.

Our medium term S&P 500 model has been predicting a significant S&P 500 correction since the end of March 2015. We define a significant correction as either a big correction or a long consolidation.

Neither a big correction nor a long consolidation has been completed as of October 9, 2015. Hence, we are waiting for a significant correction to be completed before we buy stocks.

If the S&P 500 completes a long consolidation, we’ll buy back our UPRO (3x leveraged S&P ETF) at approximately the same price that we sold it at. If the S&P 500 completes a big correction, we’ll buy back our UPRO at a 40%+ discount.

We’ll cover the following topics in this post:

Shorts are getting squeezed

The S&P has been rallying furiously since October began. It rallied 140 points in 8 days. There is only one explanation for this level of strength in the market: bearish traders are getting short squeezed.

Short interest has been very high since the August 24 crash. Many traders believe that the S&P will retest its August 24 lows. (We believe that too, but our belief means nothing. We follow our models 100%.) With such a large amount of short positions, it’s very easy for bullish investors to create a massive short squeeze like the one we’ve seen over the past 2 weeks.

The following chart from Sentimentrader illustrates NYSE short interest. As you can see, short interest is very high historically speaking. It is now higher than it was during the big corrections of 2011 and 2010.

The S&P 500 Should Reverse Down from its 200 SMA

The good traders that we talk to are all waiting for the S&P to reach the 2060-2040 range before they start selling. Perhaps their short term outlook is correct. 2060 is where the 200 sma lies, and 2040 is previous support that has now become resistance.

One of two scenarios are playing out right now.

We don’t know which of these 2 scenarios will play out. But regardless of which scenario plays out, the S&P should temporarily reverse down from its 200 sma.