Rally Day 93: 5th Segment Over at -2.3% from the Highs; Correction Risk Skyrockets

So, ultimately, the odds of seeing an 8% correction in the QQQ have decreased in favor of a correction greater than 10%?

8% corrections are the exception. They do happen, but it’s rare. I’d say 20% chance. 1 in 5 rallies of this magnitude end up with only an 8% correction. So 80% chance larger. But 1 in 5 does happen a lot. We saw an 8% correction last year (March 2024 after a 35% rally). So it does happen after big runs. It’s just rare.

I tend to believe that the probability of seeing a correction greater than 12% or 14% is now over 60%, whereas it was only 30% a few weeks or months ago.

When looking at the top largest rallies going back 15-years, here’s what we’ve seen:

-14.17% (Covid)
TBD (current rally)
-11.63% (Mar 2023)
-17.61% (Aug 2015)
-11.53% (Dec 2018)
-8.07% (Nov 2023)
-30.89% (Oct 2019)
-12.05% (Nov 2020)
-11.38% (Dec 2011)

OUt of the 8 largest rallies (not counting this one) 50% or 4 were between 11-12%, 3 were between 14-30%. 1 was at 8.07%. That would suggest a 13% chance of an 8% correction and 37% chance of a 14%+ correction and 50% chance of an 11-12% correction. At least that’s the breakdown for the 8 largest corrections not counting this one.

You also point out that the current rally is unprecedented in over 15 years, and at the same time, you point out that you’re seeing a standard correction for QQQ and NVIDIA.

The return is unprecedented but predictable. With the QQQ down 25%, it needed to rally 35% just to get back to the highs. So we knew this would be a record setting rally.

The reason we expect a standard correction 10-12% is because 50% of all rallies like this lead to a 10-12% correction. We can’t know right now whether it will be a larger correction. There’s nothing indicating that to us. That’s just a guess. A hope. A maybe. What we can say with confidence is that we’ll very likely see a 10%+ correction.

Are you still aligned on the fact that we can’t have a larger correction because we already had that between February and April?

Having already had a major correction in February – April does reduce the chances that we see a larger correction. But it has happened before. We could see another major correction here given the size of the rally.

Consider Covid for example. The covid correction was 30% and ended in March 2020. After the QQQ completed the post covid rally in August 2020, the QQQ then sustained a 14% correction. So we saw a 30% correction followed by a 14% correction. So it can happen and has happened. There were a few large sell-offs that occurred back to back in 2018-2019 as well.

But what about a historically atypical rally? Is it a historically atypical correction, or at least a non-standard correction?

This rally isn’t atypical or different. It’s just big. In fact, it is a very typical rally in terms of form. It has thus far played out like every other rally just bigger. And it’s bigger because the correction that came before art was the 2nd largest correction going back 15-years. Covid Correction at 30% was #1. The tariff correction of 2025 at 25% was #2. The rally played out the same way as any other high volatility rally. The percentage gains were just larger. The QQQ had to rally a minimum of 33.33% just to get back to the highs. Then you expect a minimum +4% on top of that. That means the QQQ was slated to return 37.33% as a matter of standard practice. It hit 45%. That’s only 8% past what is EXPECTED of the rally. In terms of sessions, 80-100. It topped at Day 89. So far everything is playing out as expected. So not really atypical. Just large.

can you update the correction probabilities to 8%, 10%, 12%, 14%, and more, Sam?

So when I give odds, I’m not guessing here. I just give you the history. If you go back and look at past corrections, you can get a sense of probability. Just check Table 4.1 in the NASDAQ Tables section of the site.

But let me give a bit of a hint. As I mentioned above, for the top 8 rallies, it’s 50% of those runs saw a 10-12% correction; 37.5% saw a much larger correction 14%+ and 12.5% saw a smaller correction of 8% or less.

The whole table shows this:

13 correction below 10%
10 correction between 10-13%
10 Correction between 13-30%

So from this, you have a 40% chance to see a sub-10% correction after the average rally. A 60% chance to see 10-30%. A 30% chance to see 10-13% and 30% chance to see 13-30%.

That’s the total odds. But if you look at the biggest rallies. You have 15 rallies that are north of 20% (16 if you count this one). Here’s the breakdown:

4 corrections of sub-10%
6 corrections of 14%+
5 corrections of 11.5-13%

So the breakdown is almost the same. 26% chance of a sub-10% correction. 40% chance of a 14%+ correction. 33% chance of a 11.5-13% correction.

Collectively, there’s a 59% chance the correction falls between 8% and 13%.