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:
- 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
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.
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.
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.
Here’s what happens next to the CRB Index
This is more bullish for stocks and more bearish for commodities.
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 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.
Here’s what happens next to the S&P when the S&P:Russell ratio is above its 200 dma for 175 days.
Here’s what happens next to the Russell.
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 Citigroup Economic Surprise Index has been below 0 for 79 consecutive days.
While this isn’t consistently bullish or bearish for stocks…
It is more bearish for the U.S. Dollar Index.
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.
Here’s what happened next to VIX.
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.
We have examined this individually in the past:
- What happens when copper falls and stocks rise
- 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%.
Not consistently bullish or bearish for stocks on any time frame.
However, this is more bearish for copper.
Copper is now down 8 weeks in a row.
The last time copper fell 8 weeks in a row was during the 2001 recession and bear market.
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.
And lastly, gold is up 8 days in a row.
Here’s what gold did next during similar historical cases.
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.
Here is our discretionary market outlook:
- 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.
- 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.
- Market studies over the next 1-2 weeks are mixed (some bullish and some bearish). Trade war news only adds to this uncertainty.
- HOWEVER, our market studies for the next 1-3 months are starting to turn more bullish.
- We focus on the medium-long term.
Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.
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