Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20
AMAZON Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 11th Jan 20
Gold Price Reacting to Global Flash Points - 11th Jan 20
Land Rover Discovery Sport 2020 - What You Need to Know Before Buying - 11th Jan 20
Gold Buying Precarious - 11th Jan 20
The Crazy Stock Market Train to Bull Eternity - 11th Jan 20
Gold Gann Angle Update - 10th Jan 20
Gold In Rally Mode Suggests Commitment of Traders (COT) Data - 10th Jan 20
Disney Could Mount Its Biggest Rally in 2020 - 10th Jan 20
How on Earth Can Gold Decline During the U.S. – Iran Crisis? - 10th Jan 20
Getting Your HR Budget in Line - 10th Jan 20
The Fed Protects Gamblers at the Expense of the Economy - 9th Jan 20
Last Chance to Get Microsoft Windows 10 for FREE! - 9th Jan 20
The Stock Market is the Opiate of the Masses - 9th Jan 20
Is The Energy Sector Setting Up Another Great Entry? - 9th Jan 20
The Fed Is Creating a Monster Bubble - 9th Jan 20
If History Repeats, Video Game Stocks Could Soar 600%+ - 9th Jan 20
What to Know Before Buying a Land Rover Discovery Sport in 2020 - 8th Jan 20
Stock Market Forecast 2020 Trend Analysis - 8th Jan 20
Gold Price at Resistance - 8th Jan 20
The Fed Has Quietly Started QE4 - 8th Jan 20
NASDAQ Set to Fall 1000pts Early 2020, and What it Means for Gold Price - 8th Jan 20
Gold 2020 - Financial Analysts and Major Financial Institutions Outlook - 8th Jan 20
Stock Market Trend Review - 8th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Market’s Short term Outlook is Slightly Bearish, But Medium term is Bullish

Stock-Markets / Stock Markets 2018 Nov 06, 2018 - 04:31 PM GMT

By: Troy_Bombardia

Stock-Markets

The U.S. stock market’s daily volatility is high, with large intraday swings. Here’s the S&P 500.


Let’s analyze the stock market’s price action by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

*Probability ≠ certainty.

The end of a very long losing streak

The current correction’s most notable feature is that small cap stocks have fallen much more than large caps.

Here’s the Russell 2000 Index.

The Russell 2000 just ended its 6 week losing streak.

Here’s what happens next to the Russell (historically) when the Russell breaks a 6 week loss streak.

As you can see, the Russell tends to go up 3-12 months later. The 1998 case was an exception. The overall stock market went up from 1998 – 2000, but small caps lagged significantly.

A subdued VIX

The interesting thing about this correction is that while the S&P has fallen more than -10%, VIX didn’t even close above 30.

This is uncommon because VIX tends to rise much more when the S&P falls -10%.

Here’s what happened next to the S&P (historically) when the S&P fell more than -10% from a 1 year high while VIX is under 30 (first case in 3 months)

As you can see, the S&P tends to go up 6 months later.

More signs that the stock market will retest its lows.

These quick corrections don’t usually see the S&P rally to new highs immediately. The stock market often bounces along the bottom, with big swings up and down before heading higher.

The S&P made a “bearish engulfing candle” today, whereby the S&P’s daily HIGH was > the previous day’s HIGH, and the daily LOW was < the previous day’s LOW.

Such large bearish engulfing candles are uncommon.

Here’s what happened next to the S&P 500 (historically) when it made a bearish engulfing candle, the S&P went up >1% the previous day, and the S&P fell more than -0.6% today

As you can see, the S&P tends to fall over the next 2 weeks, with a median drawdown of -2%

These are neither bullish nor bearish for the stock market

Whenever the stock market falls on a Friday, I see a lot of people saying “watch out in case next Monday crashes like October 19, 1987!” This is based on the idea that markets don’t bottom on Friday’s: a “down” Friday = a “down” Monday.

Recently, the U.S. stock market has fallen on a lot of Fridays. 6 of the past 7 Fridays have seen the S&P fall.

This has happened 51 times from 1927 – present. The S&P’s forward returns on every time frame (daily, weekly, monthly, yearly) were no different from random. This is neither bullish nor bearish for the stock market.

With that being said…

The S&P’s weekly LOW has been below its 20 weekly Bollinger Band for 2 consecutive weeks.

Does this mean that the stock market will bounce?

Here’s what happens next to the S&P (historically) when its weekly LOW is more than -1% below its lower Bollinger Band for 2 consecutive weeks (first case in 3 months).

As you can see, the S&P’s forward returns are no better than random.

A long term bearish study, and why I’m not concerned

  1. XLY = consumer discretionary ETF
  2. XLP = consumer staple ETF

The XLY:XLP ratio tends to tank during a bear market because consumers cut discretionary spending much faster than necessary spending.

The XLY:XLP ratio has tanked during this correction.

As you can see in the following chart, this ratio collapsed during the 2000-2002 bear market and 2007-2009 bear market.

Here’s what happens next to the S&P 500 (historically) when the XLY:XLP ratio falls more than -10% below its 50 day moving average (first time in 1 month)

As you can see, with the exception of the February 2016 case, all of these signals happened in the context of a bear market. That’s why the S&P’s forward returns were so aweful.

Here are the signal dates plotted onto a chart of the S&P 500.

But even in the bear market cases, the stock market tends to go up 1 month later.

I am not too concerned about this seemingly long term bearish study. Market studies that focus on sector ETFs aren’t exceptionally useful because the data is almost always limited from the 1998 – present. Limited data = limited usefulness.

Morever, individual sectors are heavily skewed by individual stocks. Amazon accounts for more than 20% of XLY

Amazon has fallen much more than the broad market during this correction, which is why XLY and the XLY:XLP ratio have tanked.

The falling XLY:XLP ratio isn’t a sign that consumers are shifting from discretionary to necessity spending. It symbolizes Amazon’s weakness.

Click here to see yesterday’s market study

Conclusion

Our discretionary technical outlook remains the same:

  1. The current bull market will peak sometime in Q2 2019.
  2. The medium term remains bullish (i.e. trend for the next 6-9 months). Volatility is extremely high right now. Since volatility is mean-reverting and moves in the opposite direction of the stock market, this is medium term bullish.
  3. The short term is slightly bearish. There’s a slightly >50% chance that the S&P will retest its lows from last week. This probability isn’t exceptionally high, so I wouldn’t bank on it.
  4. When the stock market’s short term is unclear (as it is most of the time), focus on the medium term. Step back and look at the big picture. Don’t lose yourself in a sea of noise.

Our discretionary outlook is usually, but not always, a reflection of how we’re trading the markets right now. We trade based on our clear, quantitative trading models, such as the Medium-Long Term Model.

Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.

Click here for more market studies

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules