Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
FOMC Minutes Reveal an Important Shift That’s Key for Gold, Too - 22nd Nov 19
Adaptive Predictive Modeling Suggests Stock Market Weakness Into 2020 - 22nd Nov 19
Why You Should “Follow the Money” on The Yellow (and Silver) Brick Road - 22nd Nov 19
This Invisible Tech Stock Threatens Amazon with 800,000+ Online Stores - 21st Nov 19
Crude Oil Price Begins To Move Lower - 21st Nov 19
Cracks Spread in the Precious Metals Bullion Banks’ Price Management System - 21st Nov 19
Why Record-High Stock Prices Mean You Should Buy More - 20th Nov 19
This Invisible Company Powers Almost the Entire Finance Industry - 20th Nov 19
Zig-Zagging Gold Is Not Necessarily Bearish Gold - 20th Nov 19
Legal Status of Cannabis Seeds in the UK - 20th Nov 19
The Next Gold Rush Could Be About To Happen Here - 20th Nov 19
China's Grand Plan to Take Over the World - 19th Nov 19
Interest Rates Heading Zero or Negative to Prop Up Debt Bubble - 19th Nov 19
Plethora of Potential Financial Crisis Triggers - 19th Nov 19
Trade News Still Relevant? - 19th Nov 19
Comments on Catena Media Q3 Report 2019 - 19th Nov 19
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

A Stock Market Rally With No Pullbacks. What’s Next for Stocks

Stock-Markets / Stock Markets 2019 Feb 13, 2019 - 05:27 PM GMT

By: Troy_Bombardia

Stock-Markets

In a rally with no pullbacks, the S&P 500 has finally closed above its 200 day moving average (slightly).


Go here to understand our fundamentals-driven long term outlook.

Let’s determine the stock market’s most probable medium term direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day.

*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are blindly “guessing” the future.

No pullbacks

There have been no meaningful pullbacks during the stock market’s rally, leaving many traders sitting on the sidelines.

The S&P has rallied more than 15% over the past 33 days, while experiencing only two -1% daily losses.

Similar no-pullback rallies happened in:

  1. August 2009
  2. November 1998 (after the -20% decline)
  3. June 1997
  4. February 1987
  5. December 1962
  6. July 1955

*Data from 1950 – present

The stock market’s 2 month and 6 month forward returns were quite bullish

Breakout

The S&P 500 closed above its 200 day moving average, albeit just barely. This breakout occurs after the S&P was deeply oversold in December 2018.

Here’s what happens enxt to the S&P when it closes above its 200 dma, after being more than -14% below its 200 dma sometime in the past 3 months.

*Data from 1950 – present

As you can see, the stock market’s 3-12 month foward returns are bullish

Baltic Dry Index

As the Baltic Dry Index continues to fall, some permabears are asking “how can the U.S. stock market be much higher today than where it was in 2016, if the Baltic Dry Index today is exactly where it was in 2016”?

*This question is non-sensical. It’s like asking “how can the stock market today be much higher than where it was in 1955, even though the Unemployment Rate today is the same as the Unemployment Rate in 1955”? The Baltic Dry Index swings in a wide range over the long term.

The Baltic Dry Index (a measure of global shipping) is now -56% below its 200 dma, signaling a slowdown in global trade.

Historically, this is not consistently bullish or bearish for stocks. This indicator has too many false signals.

Railroads

While broad stock market indices are still a ways off from all-time highs, the Dow Jones Railroad Index is already near all-time highs. Is this a bullish sign for the stock market?

Here’s what happens next to the S&P when the Dow Jones Railroad Index is within -2% of a 1 year high, while the S&P is more than -6% below its 1 year high

Not consistently bullish or bearish. Sometimes this happens in bear markets (see 2001-2002 and 2008). Sometimes this happens in bull markets.

Low volatility

The S&P Low Volatility ETF (SPLV) is overbought. Is this a short term bearish sign for the S&P 500 or SPLV?

Here’s what happens next to SPLV when its 14 day RSI exceeds 76

There is a slight tendency for SPLV to fall in the short term.

Here’s what happens next to the S&P

Do not take this as a long term bullish sign. The historical data for SPLV dates from 2011-present. Since there is no bear market data for SPLV, it’s only natural that all the 6-12 month forward returns are bullish.

Breadth

There are 2 ways to use breadth indicators:

  1. Breadth extremes
  2. Breadth divergences

I find breadth extremes to be more useful than breadth divergences. The problem with “divergences” isn’t that they don’t work. It’s that they work 50% of the time, i.e. not much better than a coin toss.

  1. Sometimes a divergence successfully predicts a reversal in the market
  2. Sometimes a divergence fails to predict a reversal in the market

Right now, our cumulative NYAD (a breadth indicator) is within -0.5% of a 2 year high, while the S&P is more than -6% below a 2 year high. In other words, breadth is going to make new all-time highs before the stock market does.

Historically, this is not consistently bullish or bearish for stocks

NFIB Small Business Optimism

NFIB Small Business Optimism has fallen 5 months in a row.

Here’s what happens next to the S&P 500 when NFIB Small Business Optimism falls 5 months in a row

Surprisingly, the stock market’s long term forward returns are bullish instead of bearish. Why?

  1. Major bear markets (e.g. 2000-2002, 2007-2009) usually start as choppy declines. This is because most investors are in disbelief. Their constant “buying the dip” slows down the decline.
  2. -15 to -20% corrections are usually much more fierce. I.e. a nonstop selloff

The stock market’s nonstop selloff in Q4 2018 combined with the government shutdown created a 5 month decline in NFIB Small Business Optimism. With the government shutdown temporarily over and the stock market back up, we will probably see a slight improvement in NFIB Small Business Optimism over the next few months.

Click here for yesterday’s market study

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (i.e. next 6 months) is neutral. Some market studies are medium term bullish while others are medium term bearish
  3. The stock market’s short term has a bearish lean due to the large probability of a pullback/retest. Focus on the medium-long term (and especially the long term) because the short term is extremely hard to predict.

Goldman Sachs’ Bull/Bear Indicator demonstrates that while the bull market’s top isn’t necessarily in, risk:reward does favor long term bears.

Our discretionary outlook is not a reflection of how we’re trading the markets right now. We trade based on our quantitative trading models.

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 2019 © 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