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Is the stock market today like 1999?

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Troy
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Summary:
As the S&P’s rally stalls at the 200 day moving average, some traders are wondering if the stock market could still have 1 more leg up in 2019 before the bull market ends. This is a very real possibility, and would confound the bears who thought that the stock market’s crash in Q4 2018 was the start of “the big drop” that they have been consistently anticipating over the past 9 years. Go here to understand our fundamentals-driven long term outlook. Let’s determine the stock market’s most probable medium term direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day. *Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are

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As the S&P’s rally stalls at the 200 day moving average, some traders are wondering if the stock market could still have 1 more leg up in 2019 before the bull market ends. This is a very real possibility, and would confound the bears who thought that the stock market’s crash in Q4 2018 was the start of “the big drop” that they have been consistently anticipating over the past 9 years.

Is the stock market today like 1999?

Go here to understand our fundamentals-driven long term outlook.

Let’s determine the stock market’s most probable medium term direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day.

Is the stock market today like 1999?

*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are blindly “guessing” the future.

VIX

VIX has fallen 6 days in a row, and is now below its 200 day moving average.

Is the stock market today like 1999?

Here’s what happens next to the S&P 500 when VIX falls 6 days in a row, while under its 200 dma

Is the stock market today like 1999?

Historically, this has been consistently bullish for the stock market 9-12 months later

Why?

Because in a bear market, VIX remains elevated above its 200 dma.

Is the stock market today like 1999?

Here’s what happens next to VIX

Is the stock market today like 1999?

As you can see, this is not consistently bullish nor bearish for VIX

NYSI

The NYSE McClellan Summation Index (a breadth indicator) is high right now, after being very low in late-2018.

Is the stock market today like 1999?

Here’s what happens next to the S&P when the NYSE McClellan Summation Index exceeds 850

Is the stock market today like 1999?

Is the stock market today like 1999?

As you can see, this is quite bullish for stocks 6-12 months later. Bear market rallies (e.g. 2000-2002 and 2007-2009) typically see stronger breadth readings.

50 day moving average

Another measure of breadth is the % of stocks above their 50 day moving average.

The % of S&P 500 stocks above their 50 dma has surged from less than 10% to more than 88% within 3 months

Is the stock market today like 1999?

This kind of breadth surged has happened 3 other times over the past 17 years, and all of them occurred within a bull market.

Is the stock market today like 1999?

Financial conditions

Despite the constant doom and gloom from financial media, financial conditions for the average American have improved dramatically over the past 10 years.

Here’s a chart from the University of Michigan, measuring the current financial situation compared with a year ago from respondents.

Is the stock market today like 1999?

While this means that the economy is “strong”, it is a little “too strong”.

Here are months when the “Current Financial Conditions Compared With a Year Ago” exceeded 130, overlapped onto a chart of the S&P 500

Is the stock market today like 1999?

As you can see, this is certainly a late-cycle sign for the stock market and economy.

It isn’t an immediately long term bearish sign, because sometimes this situation can persistent for years.

Rate cut

Former Fed Chairwoman said that the Fed’s next move could be to cut interest rates.

Is the stock market today like 1999?

When the Fed starts to cut interest rates, watch out.

Is the stock market today like 1999?
  1. Rate hikes should not be feared. The Fed hikes rates when the economy is growing, which is what drives bull markets.
  2. Rate cuts should be feared. Towards the end of an economic expansion, the Fed cuts rates when the economy is deteriorating, which is the driver for bear markets.

Investors should watch out for the first rate cut after the last rate hike in each economic expansion.

  1. September 18, 2007
  2. January 3, 2001
  3. June 6, 1989

Here’s what the S&P 500 did next in each of those cases

Is the stock market today like 1999?

This will be a long term bearish sign if the Fed starts to cut rates in the second half of 2019.

Is the stock market today like 1999?

Treasury yield and stocks

This content is for members only.

Click here for yesterday’s market study

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (i.e. next 3-6 months) is neutral. Some market studies are medium term bullish while others are medium term bearish
  3. The stock market’s short term has a bearish lean due to the large probability of a pullback/retestFocus on the medium-long term (and especially the long term) because the short term is extremely hard to predict.

Goldman Sachs’ Bull/Bear Indicator demonstrates that while the bull market’s top isn’t necessarily in, risk:reward does favor long term bears.

Is the stock market today like 1999?

Our discretionary outlook is not a reflection of how we’re trading the markets right now. We trade based on our quantitative trading models.

Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.

Click here for more market studies

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