Everything is rallying right now. Stocks, bonds, gold, cryptocurrency. With gold flying high and Bitcoin at $11k, is there too much speculation in this “everything rally”? Today’s headlines:
- Can the Fed cut rates with stocks flying high?
- Dow’s breadth
- Transports are lagging industrials
- VIX is making higher lows
- Gold’s volatility and momentum
- Bitcoin’s momentum
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.
Can the Fed cut rates with stocks flying high?
The stock market has surged over the past 6 months and the Fed is pondering a rate cut. Is this possible? Has the Fed cut interest rates before when the stock market was surging?
Here’s the Fed Funds rate.
Here’s every case in which the S&P rallied more than 15% over the past 6 months while the Fed cut interest rates.
The last time this happened was in 1995. It’s hard to believe, but the U.S. economy was relatively weak in the 2nd half of 1995 to early-1996. Nevertheless, the stock market rallied nonstop.
This illustrates 2 of our key beliefs:
- Contrary to popular opinion in the finance community, the Fed does not try to micromanage the stock market. The Fed tries to manage the economy. That’s why they are considering rate cuts despite the stock market’s surge. The Fed is not “an evil manipulator of free markets”.
- The stock market can rally despite economic weakness. E.g. stocks rallied despite weak economic data in the 2nd half of 1995. This is why the whole “economic growth is weakening” narrative doesn’t matter. The economy always weakens from time to time. What matters is whether or not the economic deterioration is SIGNIFICANT.
The Dow McClellan Summation Index is a long term version of the McClellan Oscillator (breadth indicator).
The Dow McClellan Summation Index has been above zero for 107 consecutive days, which is a long period of strong breadth.
Here’s what happens next to the Dow when such long streaks occur.
The stock market’s short term is a 50/50 bet, but 6-12 month forward returns are more bullish than random.
The Dow Theory states that the 2 Dow indices (Dow Jones Industrial Average & Dow Jones Transportation Average) should “confirm eachother”. If 1 index is making new highs but another is not, then this is a bearish sign.
And right now, the Dow Transportation Average is significantly lagging the Dow Jones Industrial Average.
As a result, the Industrials vs. Transportation ratio has surged.
Is this bearish?
Here’s what happens next to the S&P when the Industrials vs. Transportation ratio is more than 6% above its 200 dma.
Not consistently bearish on any time frame.
Here’s what happens to the ratio itself.
Since the ratio is very stretched, it tends to mean revert. This suggests that Industrials will soon start to underperform the Transportation Index.
VIX is making higher lows
VIX has been making higher lows since 2018 while the stock market has been making higher highs. This is a necessary but not sufficient condition for bear markets, because VIX trends higher before bear markets began.
On a shorter time frame, the S&P made a 52 week high last Friday, but VIX had still increased by more than 15% over the past 2 months.
Historically, this was mostly bullish for the S&P 2-3 months later…
…and simultaneously mostly bullish for VIX 2 months later.
Towards the end of a bull market, VIX and stocks can trend higher together, which is what we’ve seen so far since 2018.
Gold’s volatility and momentum
Given that gold has spiked recently, the Gold Volatility Index has also spiked.
The Gold Volatility Index is now more than 45% above its 200 dma. The other 3 times this happened were bearish for stocks 1 year later.
However, n=3 is a small sample size. So let’s just use gold’s daily RSI.
Here’s what happens next to gold when its daily RSI exceeds 83
The short term returns are more bearish, as gold tends to make a pullback. But 9 month forward returns are much more bullish than random. As we said in our RSI post, strong momentum is usually a feature of uptrends.
Bitcoin continues to surge. Its weekly RSI now exceeds 80.
Here’s what happens next to Bitcoin when its weekly RSI was this high in the past.
Who’s ready to make 1422% over the next year? 😂
I don’t trade cryptocurrencies.
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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