- The S&P is indecisive around its long term trendline
- Household networth surge
- Sentiment is low
- Utilities and real estate are outperforming
- Gold:oil spike
- Gold rally
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.
The S&P is indecisive around its long term trendline
The S&P 500 has been very indecisive around its long term trend, as commonly defined by the 200 day moving average.
The S&P has crossed above and below its 200 dma 14 times in the past 9 months.
It’s easy to see this as a long term bearish sign (potentially topping pattern). The last 2 times this happened were bearish.
But we are no fans of recency bias. Here’s every case in which the S&P crossed above and below its 200 dma at least 14 times in the past 9 months.
This is more bearish than random, but not bearish enough to warrant it as a problem for the stock market.
*”Random” means that the S&P goes up > 50% of the time.
When the household networth data for Q4 2018 was released in March 2019, financial media jumped all over it.
“HOUSEHOLD NET WORTH DROPS BY MOST SINCE 2008” makes for terrifying and click-worthy headlines. It implies that “today is just like 2008 all over again”.
This stands in stark contrast with today’s hype.
But like we said in March, Household networth mostly just moves inline with the market. Stock market crashes, household net worth falls. Stock market rallies, household net worth spikes.
That’s why the latest figure for household networth spiked. Stocks spiked in Q1 2019, net worth spiked.
Here’s what happens next to the S&P when Household Networth increases by more than 3.5% in 1 quarter.
You can see that the 9 month later forward returns are most bullish, after which forward returns become more bearish. 9 months from Q1 2019 takes us into the end of 2019.
Sentiment continues to fall, even though stocks bounced this week.
This is a big drop in sentiment despite a relatively small drop in the market.
Here’s what happens next to the S&P when AAII Bulls % falls below 23%, while the S&P is within 5% of a 1 year high.
Here’s another way to look at AAII, from Urban Carmel.
The 4 week average of AAII Bull-Bear Spread is now below -14%.
Outside of a recession, historical cases were mostly bullish 2-3 months later.
Utilities and real estate
Utilities and real estate have done well over the past year while yields have been falling. Here’s XLU (utilities ETF) and RMZ (REIT) vs. the 10 year Treasury yield.
Is this a bad sign for the stock market? Afterall, utilities and real estate outperformed in 2000, just before the 2000-2002 bear market.
Here’s every case in which XLU went up more than 15% over the past 7 months while RMZ (REIT) went up more than 10% and the 10 year yield fell.
Not long term bearish, with the exception of the September 2000 case.
The gold market is often used to represent demand for a “safe haven”, whereas the oil market is often used to represent economic strength (demand for energy).
Hence, the gold:oil ratio often moves inversely to the S&P, just like VIX.
The recent spike in the gold:oil ratio is quite extreme. Here’s what happens next to the S&P when the gold: oil ratio goes up more than 24% in the past 3 weeks.
And lastly, gold has gone up 7 days in a row.
Historically, this bullish momentum tends to carry forward into the next 1-2 months for gold. These 7 days streaks are more common in bull markets than bear markets, which is why this is more bullish than random for gold 6-12 months later.
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:
- The U.S. stock market’s long term risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
- Most of the medium term market studies (e.g. next 6-9 months) are bullish, although a few of trend following studies are starting to become bearish.
- Market studies over the next 1-2 weeks are mixed (some bullish and some bearish). Trade war news only adds to this uncertainty.
- HOWEVER, our market studies for the next 1-3 months are starting to turn more bullish.
- 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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