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Investors remain fearful despite the market’s recovery. What’s next for stocks

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Summary:
The stock market has recovered most of its decline in May. However, sentiment remains pessimistic. Today’s headlines: Sentiment is still pessimistic despite the stock market’s rally Put/Call ratio spiked Short term interest rates are still collapsing Breadth made a quick recovery SKEW remains depressed despite the stock market’s rally VIX remains elevated despite the stock market’s rally 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. Sentiment While AAII Bulls % (sentiment) did increase over the past week as the stock market rallied, it is still quite low. Here’s what happens next to the S&P 500 when the S&P is within -3% of a one year high, while AAII Bulls is

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The stock market has recovered most of its decline in May. However, sentiment remains pessimistic. Today’s headlines:

  1. Sentiment is still pessimistic despite the stock market’s rally
  2. Put/Call ratio spiked
  3. Short term interest rates are still collapsing
  4. Breadth made a quick recovery
  5. SKEW remains depressed despite the stock market’s rally
  6. VIX remains elevated despite the stock market’s rally

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.

Investors remain fearful despite the market’s recovery. What’s next for stocks

Sentiment

While AAII Bulls % (sentiment) did increase over the past week as the stock market rallied, it is still quite low.

Investors remain fearful despite the market’s recovery. What’s next for stocks

Here’s what happens next to the S&P 500 when the S&P is within -3% of a one year high, while AAII Bulls is below 27%

Investors remain fearful despite the market’s recovery. What’s next for stocks

The S&P is mostly bullish 3 months later.

Put/Call ratio is going up

The equity-only put/call ratio spiked over the past few days even though the S&P didn’t really fall.

Investors remain fearful despite the market’s recovery. What’s next for stocks

This doesn’t happen often. Most increases in the put/call ratio coincide with stock market declines.

Here’s what happens next to the S&P when the equity Put/Call ratio increases by more than 0.2 over the past 3 days while the S&P does not fall.

Investors remain fearful despite the market’s recovery. What’s next for stocks

The S&P’s 1-4 week forward returns are more bearish than random, whereas the 3 month forward returns are mostly bullish.

3 month Treasury yields still falling

As the market expects a rate cut sometime in 2019, 3 month Treasury yields continue to fall. The decline is quite extreme, pushing the 3 month Treasury yield’s 14 day RSI below 20.

Investors remain fearful despite the market’s recovery. What’s next for stocks

Here’s what happens next to the S&P 500 when the 3 month Treasury yield’s 14 day RSI falls below 16

Investors remain fearful despite the market’s recovery. What’s next for stocks

Investors remain fearful despite the market’s recovery. What’s next for stocks

The S&P still leans bullish over the next 3 months.

Here’s what the 3 month Treasury yield tends to do.

Investors remain fearful despite the market’s recovery. What’s next for stocks

Bounce over the next 2 weeks, and then lower.

Dow’s breadth

The Dow McClellan Summation Index (breadth) rose above its 200 day moving average after spending a very brief period of time below it. This illustrates how short the recent correction has been.

Is this a sign that the rally is “all clear”?

Investors remain fearful despite the market’s recovery. What’s next for stocks

Here’s what happens next to the Dow when the Dow McClellan Summation Index was below its 200 dma for less than 3 weeks.

Investors remain fearful despite the market’s recovery. What’s next for stocks

The Dow’s 2-4 week forward returns are more bearish than random. Perhaps the stock market’s rally will pause before heading higher.

SKEW

The SKEW Index measures potential financial risk in the markets. Hence it tends to move inline with the S&P. Most of the time:

  1. S&P goes up = SKEW goes up
  2. S&P goes down = SKEW goes down

The stock market’s decline in May caused SKEW to decline significantly. But while the S&P has rallied back towards all-time highs recently, SKEW continues to hover near its lows.

Investors remain fearful despite the market’s recovery. What’s next for stocks

Is this normal?

Here’s what happens next to the S&P when it rises more than 3% over the past 3 months, while SKEW falls more than -13%.

Investors remain fearful despite the market’s recovery. What’s next for stocks

Mostly bullish 6-9 months later.

Investors remain fearful despite the market’s recovery. What’s next for stocks

VIX

While the S&P has recovered from its late-May drop, VIX still remains elevated.

Investors remain fearful despite the market’s recovery. What’s next for stocks

Is this a bearish sign? Does an elevated VIX mean that the S&P will fall a little more in the short term?

Here’s what happens next to the S&P when VIX goes up more than 7% over the past 3 weeks while the S&P goes up more than 1%

Investors remain fearful despite the market’s recovery. What’s next for stocks

Slightly bearish over the next 2 weeks.

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 6-9 months) are mostly bullish.
  3. Market studies for the next 2-3 months lean bullish.
  4. Market studies over the next 2-4 weeks are mixed-bearish.
  5. We focus on the medium-long term.

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

Investors remain fearful despite the market’s recovery. What’s next for stocks

Click here for more market analysis

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