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Certain parts of the market are being hammered. What this means for the S&P

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Summary:
While the stock market remains close to all-time highs, certain sectors and markets that are more closely related to global trade (trade war!) are being hammered. This highlights a clear dichotomy that is evident among many indicators. Today’s headlines: Improving Citigroup Economic Surprise Index Boom-Bust Barometer – bust? Semiconductors have crashed Dr. Copper has crashed VIX’s bottom Baa Corporate Bond Yields are falling Go here to understand our fundamentals-driven long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day. Citigroup Economic Surprise Index The Citigroup Economic Surprise Index is improving right now. Here’s what happens next to the S&P when the Citigroup Economic Surprise Index goes from less than

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While the stock market remains close to all-time highs, certain sectors and markets that are more closely related to global trade (trade war!) are being hammered. This highlights a clear dichotomy that is evident among many indicators. Today’s headlines:

  1. Improving Citigroup Economic Surprise Index
  2. Boom-Bust Barometer – bust?
  3. Semiconductors have crashed
  4. Dr. Copper has crashed
  5. VIX’s bottom
  6. Baa Corporate Bond Yields are falling

Certain parts of the market are being hammered. What this means for the S&P

Go here to understand our fundamentals-driven long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day.

Certain parts of the market are being hammered. What this means for the S&P

Citigroup Economic Surprise Index

The Citigroup Economic Surprise Index is improving right now.

Certain parts of the market are being hammered. What this means for the S&P

Here’s what happens next to the S&P when the Citigroup Economic Surprise Index goes from less than -50 to greater than -30 in 1 month.

Certain parts of the market are being hammered. What this means for the S&P

Boom-Bust Barometer

Zerohedge posted an interesting chart today about an indicator used by Ed Yardeni. Ed Yardeni is one of my favorite economist/strategists, and his book Predicting The Markets is one of the best investment books.

Anyways, here’s the Boom-Bust Barometer. You can see that it has absolutely collapsed during the stock market’s recent pullback.

Certain parts of the market are being hammered. What this means for the S&P

Zerohedge likes to show a limited amount of data to trigger your recency bias and sell the crash crash crash narrative. So here’s the complete data from Yardeni himself.

Certain parts of the market are being hammered. What this means for the S&P

Here’s the data in Excel format

Here’s what happens next to the S&P when the Boom-Bust Barometer falls more than -15% in 1 month (i.e. very sharp drop).

Certain parts of the market are being hammered. What this means for the S&P

The sample size is small, so let’s loosen the parameters a little. Here’s what happens next to the S&P when the Boom-Bust Barometer falls more than -10% in 1 month

Certain parts of the market are being hammered. What this means for the S&P

While this isn’t consistently bullish or bearish over the next 6-12 months, it is slightly bearish over the next 2 months.

So why has Yardeni’s Boom-Bust Barometer dropped so quickly?

Trade war.

The Boom-Bust Barometer takes the CRB Raw Industrials Index and divides it by Initial Jobless Claims. This is essentially using commodities vs. labor market as a means to gauge the overall health of the economy.

While Initial Claims have been flat over the past few months, the CRB Raw Industrials Index has dropped like a rock over the past month on trade war news.

Certain parts of the market are being hammered. What this means for the S&P

Certain parts of the market are being hammered. What this means for the S&P

Certain parts of the market are being hammered. What this means for the S&P

This indicator basically represents the weakness in trade war related sectors right now.

Semiconductors

Semiconductors tend to outperform during a bull market and underperform during a bear market. The Semiconductor:S&P ratio has tanked recently.

*Semiconductors are also related to trade, since over 80% of U.S. semiconductor sales take place outside of the U.S.

Certain parts of the market are being hammered. What this means for the S&P

The Semiconductor:S&P ratio has fallen a lot because Semiconductors have fallen much more than the S&P in the recent pullback.

Certain parts of the market are being hammered. What this means for the S&P

This is an rather large drop, and the Semiconductor:S&P ratio’s 14 day RSI has fallen below 27 recent.

Historically, this was slightly bearish for stocks over the next 2 months.

Certain parts of the market are being hammered. What this means for the S&P

Dr. Copper

Other trade war related markets are performing poorly as well. Here’s copper.

Certain parts of the market are being hammered. What this means for the S&P

The popular narrative is “copper is crashing right now, just like it did before the September 2018 top! Must be Q4 2018 all over again!”

Let’s look at the data holistically to avoid recency bias. Here’s what happens next to the S&P when copper falls more than -8% over the past 50 days while the S&P rises more than +2%.

Certain parts of the market are being hammered. What this means for the S&P

There is a slight bearish bias over the next 2 months.

Here’s what happens next to copper.

Certain parts of the market are being hammered. What this means for the S&P

VIX

Baring a late-month stock market surge, VIX will probably close higher in May than it did in April.

Certain parts of the market are being hammered. What this means for the S&P

Here’s what happens next to the S&P when VIX goes up for the first time in 5 months.

Certain parts of the market are being hammered. What this means for the S&P

Here’s what happens next to VIX

Certain parts of the market are being hammered. What this means for the S&P

Certain parts of the market are being hammered. What this means for the S&P

Baa Corporate Bond Yields

Baa Corporate Bond Yields are falling. This is usually seen as a good thing for stocks.

Certain parts of the market are being hammered. What this means for the S&P

Here’s the 6 month rate-of-change in Baa Corporate Bond Yields.

Certain parts of the market are being hammered. What this means for the S&P

Here’s what happens next to the S&P when the 6 month rate-of-change falls below -7%.

Certain parts of the market are being hammered. What this means for the S&P

Here’s what happens next to Baa Corporate Bond Yields

Certain parts of the market are being hammered. What this means for the S&P

Read Several other markets and indicators are not confirming the stock market’s rally

We don’t use our discretionary outlook for trading. We use our quantitative trading models because they are end-to-end systems that tell you how to trade ALL THE TIME, even when our discretionary outlook is mixed. Members can see our model’s latest trades here updated in real-time.

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
  2. Most of the medium term market studies (e.g. next 6-12 months) are bullish.
  3. The short term (e.g. next 1-3 months) is very noisy right now. There is no clear risk:reward edge in either direction. Some short term market studies are bullish, and others are bearish.

Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.

Certain parts of the market are being hammered. What this means for the S&P

Click here for more market analysis

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