While the S&P 500 is within 2% of its all-time highs, the S&P 500 Total Return Index (including dividends) is within less than 1% of its all-time highs.
Go here to understand our fundamentals-driven long term outlook.
Let’s determine the stock market’s most probable medium term direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day.
*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are blindly “guessing” the future.
The S&P 500 Total Return Index was within -0.2% of its all-time highs as of Monday. While the S&P 500 Index (excluding dividends) is far more popular than the Total Return Index, the Total Return Index is more useful because it includes dividends. Dividends account for a significant percentage of investors’ returns, especially in prior decades.
All in all, this has been a very fast upwards reversal. Here’s what happens next to the S&P 500 when the S&P 500 Total Return Index is within -0.2% of 1 year highs, after falling more than -15% in the past 6 months.
*Data from 1988 – present (a little limited)
Perhaps the S&P will pause under its all-time highs and fall a few % before pushing on to new highs.
*When looking at the 3 month drawdowns, remember that this study is as of Monday. The S&P already fell -0.6% on Tuesday.
The past 3 months (January – March) have been a good 3 months for the S&P 500 Total Return Index. Here’s its 3 month rate-of-change.
We can adjust this 3 month rate-of-change to take into account the risk-free rate of return on U.S. Treasuries.
Here’s our calculations of the S&P 500 Total Return Index’s sharpe ratio.
- Calculate the S&P 500 Total Return Index’s 3 month rate-of-change minus the 3 month Treasury yield.
- Calculate the standard deviation of step 1.
- Divide step 1 by step 2
Here’s what happens next to the S&P when the Sharpe ratio exceeds 1.5
*Data from 1988 – present
Once again, this demonstrates the price action that sharp reversals usually lead to new all-time highs.
The latest reading for Job Openings fell. Or as financial media would put it, “job openings fell the most since 2015” (insert scary music)
As we’ve said in the past, month-to-month readings don’t mean anything. What matters is the trend in economic data. Here’s the month-to-month % change in Job Openings.
Here’s what happens next to the S&P when Job Openings falls more than -7% in a single month.
You can quickly see that a 1 month drop in Job Openings is not bearish for stocks.
With that being said, the labor market is still a long term concern for the stock market. The labor market is “as good as it gets”, and Unemployment is no longer trending downwards. Watch out in the next few months if Unemployment and other labor market indicators start to trend upwards.
The S&P 500 is in its “buyback blackout period”. A buyback blackout period is a period of several weeks (often 5) around an earnings announcement in which companies and their executives cannot buyback stocks.
Here’s the blackout schedule for Q1 2019 earnings, from WSJ
A superficial analysis would automatically see this as a short term bearish sign. “Without corporate buybacks, what else can prop the stock market up”?
Alpha Architect did a really good study last year on the “buyback blackout” myth. And it’s mostly just that – a myth.
On average, the stock market doesn’t seem to be hurt by blackouts.
This doesn’t mean that the stock market can’t go down during blackout periods. It just means that the stock market doesn’t go down because of buyback blackouts. Don’t focus correlation with causation.
While the stock market’s returns during buyback blackouts are pretty much random vs. other periods, the stock market’s volatility does increase. This is probably because individual stocks tend to jump/tank on their earnings releases.
The overarching message is simple. The human mind is prone to “the fallacy of the single cause”, where we oversimplify things and assume that there is a single, simple cause of an outcome. It’s never that simple, especially when we are talking about rising and falling markets.
USD low volatility
The USD Index is going nowhere, which means that its volatility is quite low.
Here’s the USD Index’s 60 day standard deviation as a % of its value.
Almost reminds you a heart rate monitor
Anyways, here’s the same chart, but from 1973 – present
Here’s what happens next to the USD Index when it’s 60 day standard deviation falls to less than 0.6% of its value.
Mostly random, although there is a slight bullish lean 9-12 months later.
Here’s what happens next to the S&P
Bloomberg published an interesting article today explaining why CTA buying is a contrarian sign.
Here’s the SG CTA Index (which measures CTA performance) vs. the S&P 500. Both have done well over the past 3 months.
Here’s what happens next to the S&P when the CTA Index rises more than 4% over the past 3 months while the S&P rises more than 10%.
*Data from 2000 – present
You can see that this is somewhat of a short term bearish sign for stocks over the next 1-2 months. The data is limited from 2000 – present and the sample size is small, so be careful.
Here’s Bitcoin’s 14 day RSI (momentum indicator)
Here’s what happens next to Bitcoin when its 14 day RSI exceeds 87.
*Beware of things that have extremely limited data history.
Maybe fairy tales do exist in crypto land. Look at the 1 year forward returns (average of almost 2000%)
Do I trade crypto? Never have, and probably never will.
Do you care? Probably not.
Here’s interest in “bitcoin” according to Google Trends.
This is why we don’t use sentiment indicators. Price drives sentiment. You don’t need a sentiment indicator. Price alone can tell you what the market’s sentiment is right now.
- When price goes up, sentiment goes up. The more it goes up, the more sentiment goes up.
- When price goes down, sentiment goes down. The more it goes down, the more sentiment goes down.
Read The nonstop stock market rally continues
Here is our discretionary market outlook:
- The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimistic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
- The medium term direction (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
- We don’t predict the short term because the short term is always extremely random. At the moment, the short term does seem to have a slight bearish lean.
- In summary, 12-24 months = bearish, 12 months = neutral, 6-9 months = slightly bullish.
Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.
Our discretionary outlook does not reflect how we trade the markets right now. We trade based on our quantitative trading models. When our discretionary outlook conflicts with our models, we always follow our models.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.
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