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The stock market made a strong reversal this week

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Summary:
After falling 4 weeks in a row, the stock market reversed upwards very strongly this week. Today’s headlines: S&P strong reversal Stocks:commodities ratio at an extreme S&P continues to outperform the Russell Citigroup Economic Surprise Index hasn’t recovered VIX and the S&P both went up today Copper and yields leading the S&P down? Copper down 8 weeks in a row Gold up 8 days in a row 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. S&P strong reversal The S&P fell 4 weeks in a row, and then rallied more than 4% this week. Similar historical patterns could lead to a consolidation over the next few weeks, but this was mostly bullish 3-6 months later.

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After falling 4 weeks in a row, the stock market reversed upwards very strongly this week. Today’s headlines:

  1. S&P strong reversal
  2. Stocks:commodities ratio at an extreme
  3. S&P continues to outperform the Russell
  4. Citigroup Economic Surprise Index hasn’t recovered
  5. VIX and the S&P both went up today
  6. Copper and yields leading the S&P down?
  7. Copper down 8 weeks in a row
  8. Gold up 8 days in a row

The stock market made a strong reversal this week

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.

The stock market made a strong reversal this week

S&P strong reversal

The S&P fell 4 weeks in a row, and then rallied more than 4% this week. Similar historical patterns could lead to a consolidation over the next few weeks, but this was mostly bullish 3-6 months later.

The stock market made a strong reversal this week

Stocks:commodities

Stocks have significantly outperformed commodities, thereby pushing the S&P:CRB ratio more than 9.5% above its 200 day moving average.

*The CRB Index measures a basket of commodities.

The stock market made a strong reversal this week

A simplistic contrarian perspective would expect this ratio to mean revert, which is bearish for stocks and bullish for commodities. But that’s not what the data suggests.

Here’s what happens next to the S&P when the S&P:CRB ratio is more than 9.5% above its 200 dma.

The stock market made a strong reversal this week

Here’s what happens next to the CRB Index

The stock market made a strong reversal this week

This is more bullish for stocks and more bearish for commodities.

S&P:Russell ratio

Small caps were significantly outperforming large caps last year. The opposite is true this year – small caps have lagged.

Here’s the S&P:Russell 2000 ratio.

The stock market made a strong reversal this week

The S&P:Russell ratio has been above its 200 day moving average for 175 consecutive days. In other words, large caps have outperformed for a long time.

The stock market made a strong reversal this week

Here’s what happens next to the S&P when the S&P:Russell ratio is above its 200 dma for 175 days.

The stock market made a strong reversal this week

Here’s what happens next to the Russell.

The stock market made a strong reversal this week

Citigroup Economic Surprise Index

In light of a few disappointing economic reports (e.g. today’s jobs report), the Citigroup Economic Surprise Index fell.

The stock market made a strong reversal this week

The Citigroup Economic Surprise Index has been below 0 for 79 consecutive days.

The stock market made a strong reversal this week

While this isn’t consistently bullish or bearish for stocks…

The stock market made a strong reversal this week

It is more bearish for the U.S. Dollar Index.

The stock market made a strong reversal this week

The Citigroup Economic Surprise Index was created to predict forex moves, not the stock market.

VIX and S&P both up

VIX and the S&P both went up today, which is rare because these 2 indices tend to move in the opposite direction.

Historically, this was slightly bearish for stocks over the next 2-4 weeks.

*I wouldn’t take the 1 year forward returns too seriously. You can’t use a 1 day indicator to predict 1 year forward.

The stock market made a strong reversal this week

Here’s what happened next to VIX.

The stock market made a strong reversal this week

Are copper and yields leading the stock market down?

A very popular belief nowadays is that copper and yields are leading the stock market down.

The stock market made a strong reversal this week

We have examined this individually in the past:

  1. What happens when copper falls and stocks rise
  2. What happens when yields fall and stocks rise

But we have never looked at these 2 “divergences” together: when copper and Treasury yields fall while stocks rise.

Here’s what happens next to the S&P when copper and the 10 year Treasury yield’s 70 day rate-of-change is below -10%, while the S&P goes up more than 2%.

The stock market made a strong reversal this week

Not consistently bullish or bearish for stocks on any time frame.

However, this is more bearish for copper.

The stock market made a strong reversal this week

Copper

Copper is now down 8 weeks in a row.

The stock market made a strong reversal this week

The last time copper fell 8 weeks in a row was during the 2001 recession and bear market.

The stock market made a strong reversal this week

Does this mean that “today is 2001 all over again”? No. While a lot of traders like to use Dr. Copper’s price action to guess the state of the economy, I’d rather just look at the economic data. Hard to draw any conclusions on sample size of n=3.

Anyways, copper’s crash is probably oversold.

The stock market made a strong reversal this week

Gold

And lastly, gold is up 8 days in a row.

The stock market made a strong reversal this week

Here’s what gold did next during similar historical cases.

The stock market made a strong reversal this week

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 bullish, although a few of trend following studies are starting to become bearish.
  3. Market studies over the next 1-2 weeks are mixed (some bullish and some bearish). Trade war news only adds to this uncertainty.
  4. HOWEVER, our market studies for the next 1-3 months are starting to turn more bullish.
  5. We focus on the medium-long term.

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

The stock market made a strong reversal this week

Click here for more market analysis

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