The stock market lingers around all-time highs with extremely low volatility and volume. *My apologies for not posting over the weekend. I fell ill over the Easter long weekend, and now I’m slowly recovering. 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. Indecision The Dow has gone up down up down…. in each of the past 9 days, while swinging within a narrow 2% range. This is uncommon, and demonstrates indecision in the stock market. This indecision has occurred only 14 other times from 1896 – present, and have mostly been short term bearish
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Troy writes May 16, 2019: leading indicators macro update
The stock market lingers around all-time highs with extremely low volatility and volume.
*My apologies for not posting over the weekend. I fell ill over the Easter long weekend, and now I’m slowly recovering.
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.
The Dow has gone up down up down…. in each of the past 9 days, while swinging within a narrow 2% range.
This is uncommon, and demonstrates indecision in the stock market.
This indecision has occurred only 14 other times from 1896 – present, and have mostly been short term bearish factors for the Dow over the next month.
*I would caution investors about the seemingly bearish 6-12 month forward returns. The Dow does not include dividends reinvested, so a lot of seemingly bearish cases 6-12 months later were actually bullish once you factor in dividends reinvested.
Last week we looked at the stock market’s low volume. And just as you’d think that the stock market’s low volume can go no lower, it goes lower.
Here’s the 15 day average of SPY’s volume, making new lows.
Here’s the complete chart, from 1993 – present
It’s obvious that the upper and lower end of this range have shifted over time. To make this figure range-bound, we can look at the 15 day average’s distance from its 200 day average. Either way, volume is very low.
Here’s what happens next to the S&P when volume is this low.
Not consistently bullish or bearish for stocks
As the stock market’s rally stalls, breadth is weakening. Here’ the NASDAQ’s McClellan Oscillator (a breadth indicator). As you can see, the McClellan Oscillator’s 50 day moving average is about to cross below its 200 day moving average for the first time since January 2019.
Here’s what happens next to the NASDAQ when the NASDAQ McClellan Oscillator’s 50 dma falls below its 200 dma for the first time in 3 months.
Here’s what happens next to the S&P.
This is a short term bearish factor for stocks over the next 2 weeks.
Is Maley correct? Does the recent divergence between small caps and the S&P “bode ill for the entire stock market”?
Here’s what happens next to the S&P when it rallies more than 4% over the past 39 days while the Russell falls more than -1%.
Here’s what happens next to the Russell.
This is slightly bearish for the stock market for the next 2 weeks, and no more after that.
The NASDAQ’s momentum remains strong as it pushes to new all-time highs. The NASDAQ’s 14 weekly RSI is now at 66, a level that it did not reach in the 2000-2002 and 2007-2009 bear markets.
Here’s what happens next to the NASDAQ 100 when its 14 weekly RSI exceeded 66 for the first time in half a year.
Here’s what happens next to the S&P.
This is a bullish factor for stocks 6-12 months later.
Dow almost at new highs
Like the S&P, the Dow is almost at new all-time highs. It’s been more than half a year since the Dow visited these levels. Will the Dow pause at these levels?
Here’s what happens next to the Dow when it is within -1.1% of a 2 year high, for the first time in at least half a year.
As you can see, whether the Dow pauses at these levels in the short term is a 50/50 guess. However, the forward returns 1 year later are more bullish than random.
The Chicago Fed’s National Financial Conditions Index just made a new low for this economic expansion. In the past, financial conditions tightened before bear markets and recessions began.
Let’s assume the worst case scenario. Let’s assume that this is the low for financial conditions in this economic expansion, and that they will soon get tighter. Is this bearish for stocks?
Here’s what happens next to the S&P when financial conditions bottomed in prior economic expansion cycles.
The sample size is small, but you can clearly see that it’s better to wait for financial conditions to tighten before treating this fundamental indicator as a bearish sign for stocks.
The latest reading for Housing Starts fell a little from its previous reading. However, month-to-month readings are not important. What matters is the trend.
*Housing is a key leading indicator for the U.S. economy. The U.S. economy and stock market move in the same direction in the medium-long term.
Housing Starts’ 12 month average has fallen 6 months in a row. This is not a terrific sign for stocks, because this happened within 1-2 years of many historical bear markets and recessions.
Overall, housing is a weak point in the U.S. economy.
Gold is weak
Gold has been weak, taking out its support.
Here’s what happens next to gold when it falls to a 3 month low for the first time in at least 7 months.
As you can see, gold has a slight bullish lean 1 month later.
XLF (financial sector ETF) will soon make a “golden cross”, whereby its 50 dma rises above its 200 dma. Conventional technical analysis sees golden crosses as bullish for the market.
Here’s what happens next to XLF when XLF makes a golden cross.
As you can see, forward returns are mostly random.
Similarly, the Russell 2000 will soon make a golden cross.
And like XLF, the Russell 2000’s forward returns are mostly random.
Emerging markets have been rallying along with the U.S. stock market, confounding many market watchers who are preaching “China slowdown, EM slowdown, etc”.
Here’s EEM, the emerging markets ETF.
Here’s what happens next to the S&P when EEM and the S&P are both up more than 15% in the past 80 days.
Here’s what happens next to EEM.
Interestingly enough, this is a short term bearish factor for the stock market over the next 1 month.
Some final thoughts
Our recent market studies have a medium term bullish lean (6-12 months later) and a short term bearish lean (1 month later).
While the short term bearish case does seem convincing, I rarely like to bet on the short term. It’s just too unpredictable. Moreover, many traders are short term bearish right now, as they’ve been throughout this rally. More often than not, professionals undperform buy and hold.
Here is our discretionary market outlook:
- The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimistic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
- The medium term direction (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
- We don’t predict the short term because the short term is always extremely random. At the moment, the short term does seem to have a slight bearish lean.
- In summary, 12-24 months = bearish, 12 months = neutral, 6-9 months = slightly bullish.
Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.
Our discretionary outlook does not reflect how we trade the markets right now. We trade based on our quantitative trading models. When our discretionary outlook conflicts with our models, we always follow our models.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.
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