It’s been a strong half year for a traditional 60/40 portfolio (60% long stocks, 40% long bonds). Meanwhile, the stock market continues to face the same resistance since January 2018. Today’s headlines:
- In a rare occurrence, both stocks & bonds are having a great year
- Traditional 60/40 portfolio compared to buy and hold stocks
- Is the stock market making a quadruple top?
- REIT’s sudden decline
- Silver set to outperform gold?
- Bitcoin is soaring
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.
A great year so far
CNBC is correct in saying that bonds and stocks have had a great year so far. Here’s the S&P 500 (orange) vs. Bloomberg Barclays U.S. Aggregate Bond Index (blue).
*Bloomberg Barclays Aggregate Bond Index combines corporate bonds and Treasury bonds.
Is this rare occurrence bullish or bearish? Here’s what happens next to the S&P when it rallies more than 15% over the past half year while Aggregate Bonds rally more than 5%.
Here’s what happens next to Aggregate Bonds.
Mostly bullish for both bonds and stocks.
Speaking of stocks and bonds, the 60/40 portfolio continues to push towards new highs.
Over the past 40+ years, a 60/40 portfolio has returned approximately the same as buy and hold for the S&P 500, but with smaller drawdowns (see 2000-2002 and 2007-2009 bear markets). Of course, this is partially due to a 40 year bull market in bonds.
Here’s the 60/40 portfolio on a log scale
Is the stock market making a quadruple top?
When many traders look at the Dow’s chart, they wonder “is the stock market making a quadruple top?” As Tiho Brkan pointed out, quadruple tops are rare.
Let’s take a look at major bull market peaks in the past.
Here’s 2007: no quadruple top.
Here’s 2000: multiple tops
Here’s 1973: no quadruple top.
Here’s 1968: no quadruple top.
Here’s 1937: no quadruple top.
Here’s 1929: no quadruple top.
Bottomline: tops come in many different patterns. While a quadruple top is rare, it is not impossible (see 2000). I don’t place a high reliance on chart patterns. For example, if someone in 2000 said “the stock market can’t top right now, there has never been a quadruple top before”, they would have been wrong. There’s a first time for everything, especially when the sample size is low.
REITs sudden decline
The REIT etf RWR has dropped significantly over the past 4 days after making a new all-time high.
These sudden declines can lead to more selling in the short term for RWR…
… and is not a bullish short term sign for the S&P.
The gold:silver ratio has surged recently as silver continues to underperform gold.
As a result, gold:silver ratio’s 14 week RSI is extremely high. Here’s what happens next to gold when the ratio’s RSI exceeds 75
Here’s what happens next to silver.
Silver tends to do better than gold over the next 3 months, suggesting a mean reversion in the ratio.
And lastly, the chart you’ve all been waiting for. Bitcoin has soared recently, and its daily RSI is now above 85.
While such high momentum readings “eventually” lead to a correction, more often than not Bitcoin surges in the year ahead. Perhaps Tom Lee’s prediction that Bitcoin will “easily soar to $40,000” isn’t outlandish. In the land of crypto, anything is possible.
*I don’t trade crypto. Stick to what you know, avoid Shiny Object syndrome.
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 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 does favor long term bears.
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