The stock market tanked today on trade-related news. Some short term bullish signs continue to emerge, but these are not decisive. Among these short term bullish signs are other signs that suggest further short term selling. Overall, there is no clear selling exhaustion. Today’s headlines:
- Financial markets: risk off
- Volatility spike
- Put/Call ratio spike
- Economic barometer made 2 year low
- Stocks down for a 6th day
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.
The S&P:gold ratio is a reasonably useful indicator that demonstrates the risk-on vs. risk-off mood of the market:
- When stocks outperform gold, it suggests that market participants are generally bullish on future prospects for the stock market and economy
- When stocks significantly underperform gold, it suggests that there is trouble afoot somewhere in the financial markets or global economy.
Stocks crashed over the past 2 days and gold rallied in a classic safe-haven play. As a result, the S&P:gold ratio has tanked.
As you can see, the S&P:gold ratio’s 14 day RSI (momentum indicator) is extremely low, rivaling that of the December 2018 stock market bottom.
In the past, this was mostly bullish for stocks 1 month later.
VIX has doubled over the past 6 days.
Such a rapid VIX spike has only happened 5 other times.
Each of these 5 historical cases were close to a short term bottom, but not the EXACT bottom (see 3 month forward max drawdown). V-shaped bounces are rare. They are usually followed by a retest or new lows. However, each of these 5 cases saw VIX decline on every time frame.
VIX tends to reach a peak during the stock market decline’s first wave. If the stock market makes a new low (2nd decline wave), VIX often doesn’t make a new high.
The Put/Call ratio continues to rise as the stock market tanks.
One cannot use absolute levels to run historical analysis on the Put/Call ratio, because the Put/Call ratio’s “average” changes over time.
To make valid comparisons, traders can use:
- The Put/Call ratio’s distance from a moving average
- The Put/Call ratio’s 14 day RSI (momentum)
The Put/Call ratio’s 14 day RSI is at 64. Once again, this is on par with the Put/Call ratio’s RSI near the December 2018 bottom.
In the past, this was mostly bullish for stocks over the next 1-3 months.
Considering these 3 stats, should we sound the “all clear” on stocks? No. There are other bearish factors to consider that suggest the bottom isn’t in. Overall, short term risk:reward doesn’t clearly favor bulls here.
As CNBC reports, copper has broken down to a 2 year new low:
Many traders like to use “Dr. Copper” as a barometer for the global economy. We’ve examined this in the past, and usually came to the conclusion that:
- Copper isn’t terrific for understanding the U.S. economy and stock market. (It’s better to use economic data to understand the U.S. economy than to use market data to understand the U.S. economy).
- Copper is more useful for understanding ex-U.S. economies and stock markets, particularly those in emerging markets that are more infrastructure-dependent.
Anyways, here’s what happened next to the S&P when copper fell to a 2 year low.
Forward returns over the next few weeks were poor. Here’s what happened next to copper itself:
Stocks down for a 6th day
The S&P is down for a 6th day in a row. There are many different ways to slice and dice this stat, but overall they point to the same thing:
- The short term is unknown. Perhaps stocks will fall more.
- The stock market’s 6 month forward returns are mostly bullish. Really bad outcomes usually don’t start off with such a rapid decline.
Here’s what happened next to the S&P when it fell 6 days in a row from an all-time high.
To expand the sample size, we can see what happened next to the S&P when it fell 6 days in a row from a 1 year high.
And did today’s crash mark “panic selling”? Here’s what happened next to the S&P when it fell 6 days in a row, and fell more than -2% on the 6th day.
And lastly, the Australian dollar is down 12 days in a row
Longest streak since 1982
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 lean bullish.
- Short term (next 1-3 months) market studies are mixed.
- We focus on the medium-long term.
Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward favors long term bears.
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