The stock market is going nowhere as traders prepare for a rate cut. Today’s headlines:
- The stock market’s MACD
- S&P’s indecision is coming to an end
- Put/Call remains very low
- Finance stocks are finally going up
- Materials are no longer lagging the stock market.
Go here to understand our long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day.
Trend following: MACD
From a trend following perspective, traders should be long right now. If the stock market does make a short term pullback/correction, it will probably go up after that.
Here’s a monthly chart for the S&P 500. With 1 day left in July, the S&P’s MACD histogram is about to turn positive after being negative for more than half a year.
Historically, this was very bullish for the S&P over the next 1-2 years.
Final melt-up before this bull market ends? I don’t know. Instead trading based on predictions that are years into the future, I prefer to take things day-by-day.
Chris Ciovacco posted an interesting tweet, which demonstrates that the stock market’s long term range is starting to expand again:
Here’s a more detailed chart, with Bollinger Bands overlapped onto the S&P 500.
In the past, such a range expansion was typically followed by a big move over the next year. Forward returns were not consistently bullish or bearish, but they were extreme. Either extremely bullish or extremely bearish. This is what one would expect when the market breaks out from an 18 month range.
As I mentioned last weekend, the Put/Call ratio is consistently low. The Put/Call ratio has been more than -15% below its 200 dma for 5 days in a row.
This is quite a long streak, with the last one being more than 5 years ago. Historically, such a consistently low Put/Call ratio was more bearish than random for stocks over the next 1-3 months.
Similar to the Put/Call ratio, the Index Put/Call ratio is also consistently low.
Finance stocks & banks
Finance stocks consistently underperformed the stock market throughout 2018, and are finally starting to catch up. As a result, the KBW Bank Index has now registered a golden cross (50 dma crosses above 200 dma).
In the past, golden crosses were not too good for bank stocks over the next 2 weeks.
… but this was not bearish for the S&P over the next 9-12 months.
Material stocks performed very poorly throughout 2018 as commodity prices languished. Now that commodity prices are stabilizing, material stocks are no longer underperforming the broad stock market. Here’s the XLB:S&P ratio, which has made a golden cross.
*XLB = materials stock ETF
In the past, this was mostly positive for material stocks over the next 6-12 months.
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:
- Long term: risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
- Medium term (next 6-9 months): most market studies are slightly bullish.
- Short term (next 1-3 months) market studies lean bearish.
- We focus on the medium-long term.
Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward favors long term bears.
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