As the first half of 2019 draws to a close, sentiment remains bearish. Meanwhile, the stock market’s own price action triggered a popular trend following BUY signal. Today’s headlines:
- Sentiment remains bearish
- Trend following signal
- Breadth remains positive
- Treasury bonds are extremely overbought
- Australian Dollar’s 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.
According to AAII sentiment data, there have been more bears than bulls for the 7th week in a row.
On it’s own, 7 week streaks are quite bullish for the S&P 3 months later. The only 2 bearish cases occurred in July and October 2008, when the economy was ALREADY deep in a recession and the stock market had already collapsed. That’s clearly a very different environment from today.
We can narrow our focus to the 7 week streaks that occurred when the S&P was within -2% of a 1 year high. This happened:
- May 28, 1993
- September 11, 1992
- April 14, 1989
Here’s May 1993:
Here’s September 1992:
Here’s April 14, 1989:
The 1989 case is interesting because it was most similar to today. There were clear signs of economic deterioration in 1989, which rang “recession alert” bells. Similarly, many investors and traders today are concerned about weakening macroeconomic data and the potential for a recession.
Either way, such low sentiment is usually a positive for stocks.
With 1 day left until June is over, the S&P will probably close above its 10 month moving average for the month of June.
This is the 6th cross above/below its 10 month moving average in the past year, indicating indecision around its long term trendline.
The only other time that had this much indecision (August 1960) saw strong gains over the next year. But n=1 is useless.
The 10 month moving average was popularized by Meb Faber in a 2006 article explaining that this indicator as a buy/sell signal gives better risk adjusted returns.
Strategy = buy the S&P when it is above its 10 month moving average. Otherwise, sell.
Here’s the strategy plotted against buy and hold. While it does avoid massive drawdowns like 2000-2002 and 2007-2009, on its own this indicator does not beat buy and hold.
The NYSE McClellan Summation Index (long term breadth indicator) has remained above zero for a long time.
Similar long streaks were more bullish than random for the NYSE Composite 2 weeks later. But after that, forward returns were no different from random.
*The short term is always extremely hard to predict, no matter how much confidence you have.
Bonds are extremely overbought. The 10 year Treasury yield’s 14 week RSI is extremely low.
*Bond prices and yields move in the opposite direction.
Here’s what happens next to the 10 year Treasury yield when its weekly RSI falls below 23.
The 10 year yield “eventually” makes a bounce, but not always immediately. If you’re long bonds right now, know you risk:reward.
*A bounce in yields is not consistently bearish for the S&P.
And lastly, a quick note on AUD/USD. The Australian Dollar has rallied 8 days in a row.
Hard to believe how consistently bearish these streaks are for the Australian Dollar 1-3 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:
- 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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