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Similarities to the dot-com bust?

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Summary:
The stock market tanked today on more trade war news. It currently sits at a decent support/resistance level. 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 this decline just like the dot-com bust? A few weeks ago we said that there is some FOMO in the stock market, and that the last time this happened was at the 2000 bull market peak. Here are some continued similarities between today and the 2000 bull market peak. “Sell in May and go away” doesn’t always work. But when it does work, everyone starts to pay attention to this catchy phrase

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The stock market tanked today on more trade war news. It currently sits at a decent support/resistance level.

Similarities to the dot-com bust?

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.

Similarities to the dot-com bust?

Is this decline just like the dot-com bust?

A few weeks ago we said that there is some FOMO in the stock market, and that the last time this happened was at the 2000 bull market peak.

Here are some continued similarities between today and the 2000 bull market peak.

“Sell in May and go away” doesn’t always work. But when it does work, everyone starts to pay attention to this catchy phrase again.

This is one of the worst starts to May, with the NASDAQ down more than -5%. Throughout the NASDAQ’s entire history, such a terrible start to May has only happened 1 other time: May 2000

Similarities to the dot-com bust?

Similarities to the dot-com bust?

While this may look scary, it’s important to remember that n=1 isn’t useful for trading.

Let’s increase the sample size by relaxing the parameters.

Similarities to the dot-com bust?

Let’s increase the sample size again…

Similarities to the dot-com bust?

…And again

Similarities to the dot-com bust?

So while there are some bad short term drawdowns in there, this is not a consistently long term bearish sign. (Anytime you get a -5% rapid decline in 9 days, there will be big short term drawdowns. The stock market chops up and down with high volatility).

What about the S&P? Here’s what happens next when the S&P falls more than -4% in the first 9 days of May.

Similarities to the dot-com bust?

If we relax the study’s parameters (-4% to -3%), we can see that the short term still has a bearish lean.

Similarities to the dot-com bust?

Defensives

The stock market has had a clear risk-on / risk-off mentality over the past few weeks.

  1. When stocks performed well, defensives performed poorly
  2. When stocks performed poorly, defensives performed well.

While the S&P 500 tanked today, XLU (utilities – defensive sector) rallied.

Similarities to the dot-com bust?

This big of a divergence between the S&P and XLU is rare, and typically only happens in big crashes.

Similarities to the dot-com bust?

Let’s relax the study’s parameters to increase the sample size. Here’s what happens next to the S&P when it falls more than -2% in 1 day, while XLU rallies more than 1%.

Similarities to the dot-com bust?

Let’s increase the sample size again. Here’s what happens next to the S&P when it falls more than -1.5% in 1 day, while XLU rallies more than 1%.

Similarities to the dot-com bust?

Similarities to the dot-com bust?

You can see that the S&P tends to do well over the next few weeks…

…While XLU performs poorly. Risk-off

Similarities to the dot-com bust?

The persistency of this decline…

The S&P has very quickly made a -5% decline after being at an all-time high.

Similarities to the dot-com bust?

This alone is not uncommon or consistently bullish/bearish.

Similarities to the dot-com bust?

But what is rare is that the S&P has sold off almost every single day over the past 6 days, with lower LOWS and lower HIGHS almost every day.

On an intraday chart, this looks like a non-stop slide

Similarities to the dot-com bust?

Historically, these kind instant and non-stop -5% declines from an all-time high were not great for stocks 2 months later

Similarities to the dot-com bust?

Index Put/Call

The Put/Call ratio spiked on Friday, when stocks were decent. The Put/Call ratio tanked today after stocks crashed. Looks like someone bet on a Monday crash, and took some profits.

Here’s the Index Put/Call ratio, which crashed today. This is uncommon considering that the S&P tanked today as well.

Similarities to the dot-com bust?

Here’s what happens next to the S&P when it falls more than -2% while the Index Put/Call ratio falls more than -0.4 in one day

Similarities to the dot-com bust?

Rare.

Let’s relax the parameters. Here’s what happens next to the S&P when it falls more than -2% while the Index Put/Call ratio falls more than -0.3 in one day

Similarities to the dot-com bust?

There is a bullish lean over the next 1 week, even during the 2008 crash.

NASDAQ:SPX

The NASDAQ:S&P ratio tends to go up during bull markets and go down during bear markets. This is because the NASDAQ is more volatile than the S&P.

Similarities to the dot-com bust?

The NASDAQ:S&P ratio has fallen very quickly over the past few days, which demonstrates the sudden decline in stocks. In fact, the NASDAQ:S&P ratio is now more than -3 standard deviations below its 20 day moving average.

Similarities to the dot-com bust?

Historically, this was slightly bullish over the next 2 months for the S&P.

Similarities to the dot-com bust?

Volume

Volume was very low in April. And now that the stock market is falling, volume is rising. Volume tends to move inversely to the S&P.

Similarities to the dot-com bust?

Similarities to the dot-com bust?

The 10 day moving average in SPY’s volume has increased more than 75% from 10 days ago. Is this a bullish sign for stocks?

Similarities to the dot-com bust?

Not quite. A 75% increase in volume is uncommon, but a more bullish sign would be if volume increased more than +100%.

Similarities to the dot-com bust?

Breadth

The % of stocks above their 200 dma has fallen below this figure’s own 50 dma, for the first time in 3 months.

Similarities to the dot-com bust?

Sample size is small, but this is mostly bullish for stocks 6-12 months later.

Similarities to the dot-com bust?

There’s always a bull market somewhere.

And lastly, I would like to draw your attention to Bitcoin. Crypto is on fire right now after 2018’s massive bear market.

Similarities to the dot-com bust?

Bitcoin’s 14 week RSI is now above 75. Think this is overbought?

Similarities to the dot-com bust?

*Would I trade Bitcoin for +2316% in 1 year? No. I don’t trade crypto.

Read Is this a bull trap, just like October 2018 all over again?

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. When our discretionary outlook conflicts with our models, we always follow our models.

Conclusion

Here is our discretionary market outlook:

  1. 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.
  2. The medium term direction (e.g. next 6-12 months) leans bullish
  3. The short term is very noisy right now. There is no clear risk:reward edge in either direction (bullish or bearish). Some short term market studies are bullish, and others are bearish. And with trade war news flying left and right, we have even less conviction for the short term than usual.

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

Similarities to the dot-com bust?

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 analysis

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