The stock market bounced today, recovering some of yesterday’s losses. From a big picture perspective, the stock has gone nowhere since January 2018. Many traders are once again asking “is the recent breakout just another false breakout”? Today’s headlines:
- Trendless stock market
- Down volume
- Short term breadth recovery
- Stock market’s risk-off stance
- Recession probability
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.
Trendless stock market
As Bespoke noted on CNBC, the S&P’s long term trend (200 day moving average) has been in a consolidation for months.
There are many different ways to define the phrase “200 day moving average has gone nowhere”. One such way is to look at the 200 day moving average’s standard deviation.
- When the standard deviation is low, it means that the 200 day moving average isn’t fluctuating significantly.
- When the standard deviation is normal or high, it means that the 200 dma is going up or down.
The 200 dma’s standard deviation has been below 1% of the S&P’s value for 75 consecutive days. That’s a long streak.
Similar periods of trendless markets mostly saw gains over the next year.
Final breakout on the upside going into 2020? We’ll see. Let’s look at the data day-by-day.
The past 4 days saw heavy selling, with an average of 76% of the volume on the downside. Today’s rally saw volume return to normal, with down volume at “just” 34%.
Historically, a spike in down volume that abated was random for stocks in the short term, but mostly bullish over the next 6-12 months.
It’s also interesting to note that most of these cases have occurred over the past 15 years. Perhaps this has to do with the increase in popularity of ETFs. As passive investing becomes more and more popular, extremities in volume become more common.
*When someone sells an index ETF, doing so hurts every stock in the index. When someone buys an index ETF, doing so benefits every stock in the index.
Short term breadth recovery
Yesterday was a pretty bad day for stocks, no matter how you define “bad day”. Only 11 S&P stocks went up yesterday. On today’s rally, 411 stocks went up.
When this short term breadth indicator made a similar V-shaped recovery in the past, there was usually more selling over the next week. There was almost always a drawdown over the next 1 week.
The market is exhibiting a strong risk-off stance, as demonstrated by Babak. The stock market and Treasury bond yields have a strong positive correlation. Yields are falling when stocks tank as investors bid up safe assets, and yields go up when stocks rally.
*Since yields and bond prices move inversely, stocks & bond prices have a strong negative correlation right now.
Here’s what happened next to the S&P when its 30 day correlation with the 10 year Treasury yield exceeded 0.8, while the S&P’s 14 day RSI was under 40 (i.e. risk-off when stocks are in a downtrend).
As you can see, the S&P tends to rally over the next 2 weeks.
I also find it interesting that all of these cases occurred over the past 20 years.
And lastly, the New York Fed’s Recession Probability Model has now been above 30% for 2 months in a row.
*This model is based on the yield curve.
In the past, this wasn’t too good for stocks over the next 6-12 months.
The yield curve continues to be a weak point in the macro picture, but it isn’t the only thing to consider for macro.
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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