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Bear markets simply don’t start this way

Summary:
Mid-week market update: There remains a fair amount of stock market skittishness among my readers and on my social media feed. Let me assure everyone that bear markets simply don`t start this way. SentimenTrader has an intermediate to long-term sentiment model called AIM “which averages the momentum of the four major sentiment surveys”. This model is not perfect at calling the exact bottoms or spotting exact turning points. Nevertheless, it has done a good job of defining the risk and reward of owning stocks when readings are at bearish extremes, which is contrarian bullish. The model is currently on a buy signal. From a top-down macro perspective, Bespoke recently pointed out that the Philly Fed General Conditions Index hasn’t been this high for some time. Despite the mutterings of

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Mid-week market update: There remains a fair amount of stock market skittishness among my readers and on my social media feed. Let me assure everyone that bear markets simply don`t start this way.

SentimenTrader has an intermediate to long-term sentiment model called AIM “which averages the momentum of the four major sentiment surveys”. This model is not perfect at calling the exact bottoms or spotting exact turning points. Nevertheless, it has done a good job of defining the risk and reward of owning stocks when readings are at bearish extremes, which is contrarian bullish. The model is currently on a buy signal.

Bear markets simply don’t start this way

From a top-down macro perspective, Bespoke recently pointed out that the Philly Fed General Conditions Index hasn’t been this high for some time. Despite the mutterings of permabears (I’m looking at you Rosie), recessions simply do not start this way.

Bear markets simply don’t start this way

BTW, the Philly Fed New Orders component surged to an all-time-high, and the last time it rose this much in a single month was October 2005.

Bear markets simply don’t start this way

These conditions are all pointing to further intermediate term equity strength. Expect a test of the old highs in the major equity indices this summer, and probably new all-time highs.

However, stock prices don’t go up in a straight line. The short run equity outlook is a little different.

Trust the bull, but verify the trend

In the short-term, the bulls face a number of challenges. While the upside breakout through the downtrend line is constructive, the SPX failed at 2740 resistance while exhibiting a negative RSI-5 divergence. These conditions suggest some consolidation or pullback over the next few days. Likely support can be found at the partially filled gap at about 2700.

Bear markets simply don’t start this way

The hourly chart is also supportive of the minor pullback thesis. The index breached an uptrend line that began on May 8, 2018. Under these conditions, minor weakness is likely, and it will be up to the bears to see if they can take control of the tape.

Bear markets simply don’t start this way

In light of the recent resurgence of small cap leadership and likely short-term market weakness, my main working hypothesis calls for either a successful SPX test at 2700, or a test of the small cap relative uptrend as signals that the pullback is over.

Bear markets simply don’t start this way

My inner trader remains partially long the market. He trusts the bull, but he is verifying the short-term trend.

Disclosure: Long SPXL

About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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