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How Much Longer Can This Rally Last?

When the market wants to be strong, boy, can it be strong.  The S&P futures since Nov. 16, 2010 (our last pull back, though even that one was minuscule) are now up 12.5%.  Time to bust out the market probability model.  I am specifically looking for all days when the 57 day (number of days since Nov. 16) change has been greater than 12%.  From there, I examine the next 5, 10, and 20d change.  I will play around with the input parameters to try to come to some conclusion.  Below are the results of the model.

The output of the model is denoted in bold font inside the outlined boxes.  This first snapshot shows that, given the Spooz are up over 12% in the past 57 days, the probability of the market being up (more than 0%) in the subsequent 5 days is 46.6%, 50% in the next 10 days, and 64.4% in the next 20 days.  From those numbers alone, no signs of a pull back.  Separately, I take a look at potential downside by calculating the probability of the market going down more than 1% (which is the input parameter I arbitrarily selected) IF the market does go down.  In other words, I am attempting to gauge just how big of a correction we would get should the market have a pull back.  The probability of the Spooz being down more than 1% if the market does trade down in the next 5, 10, and 20d is 63.5%, 77.8% and 42.9%, respectively.  This last piece here is interesting to me as the figures suggest that if we do get a correction, it will likely last for about 10 days and be a larger than 1% correction.

When I modify the downside input to 2%, the output changes as follows:

When I modify the downside input to 3%, the output changes as follows:

The last example shows that the odds of a greater than 3% correction in the next month are not that great.  The odds of a greater than even 2% correction are not that high.  This outcome is a bit contrary to what I had expected.  I would have thought that after such a strong rally and length of time the market has been in overbought conditions, a massive correction would have been likely.  Intuitively, I do believe in a massive correction, but based on numbers alone, the probability calls for only a minor one.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.