Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Various Stock Market Indicators are Plunging. Run for the Hills!

Stock-Markets / Stock Markets 2019 Mar 09, 2019 - 03:23 PM GMT

By: Troy_Bombardia

Stock-Markets

The S&P 500 is pulling back from its 2800 resistance. Meanwhile, the latest readings for various widely publicized technical and fundamental indicators plunged. And right on cue, mainstream financial media broadcasted these indicators with a megaphone because hey, nothing sells like bad news. (Modern day finance is all about the marketing hype).


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.

Household networth

Household networth in Q4 2018 fell almost 4%. And of course, the media sensationalized this fact as “the biggest decline in household net worth since the financial crisis” (insert scary music). Any indicator that relates today to the financial crisis is a marketer’s journalist’s wet dream. Marketer’s know that the best way to attract attention is to stoke peoples’ biggest desires or biggest fears.

Should a rational investor/trader run for the hills because household networth plunged in Q4 2018?

No. There are reasons to be bearish, but this isn’t one of them.

Here’s a long term chart to put the “plunge” into perspective.

More importantly, household networth is a coincident indicator for the stock market. It plunged because asset values fell significantly in Q4 2018. Turning bearish just because the market is falling is nonsensical.

As you can see in the above chart, household networth plunges whenever the stock market experiences a weak quarter (counting from the first day of the quarter to last day of the quarter). A stock market crash typically coincides with weakness in other financial assets as well.

This is coincident. It has no predictive value.

Here’s what happens next to the S&P when the inflation-adjusted household networth falls more than -3% in one quarter.

Future returns are mostly random.

Citigroup Economic Surprise Index

Here’s another often-used marketing trick from financial experts and trading gurus

  1. Overlap the S&P 500 onto another indicator. Make sure that the S&P and this indicator had a decent correlation over recent past.
  2. Demonstrate how the S&P is “decoupling” with the indicator right now.
  3. Adjust the scales on the S&P and indicator to increase the effect
  4. Crash crash crash crash.

*You see this trick on the WSJ and Zerohedge all the time.

Here’s an example. The Citigroup Economic Surprise Index has “decoupled” with the S&P, which “suggests that the stock market will crash”.

A rational trader/investor would look at the bigger picture and examine how useful these correlations actually are. Correlations break all the time. Not exactly “decoupling”.

Here’s a longer term look at the Citigroup Economic Surprise Index.

This index was recently at -43, which is the lowest reading since 2017.

Historically, such readings more more bullish than bearish for the S&P 3 months and 9 months later.

Why?

Because the Citigroup Economic Surprise Index doesn’t measure the state of the economy. It merely measures the state of economic data versus analysts’ expectations. Reality vs. expectation is a cycle. When reality constantly disappoints expectation, it will likely soon start to beat expectations.

Smart Money Flow

Here’s another recent chart that became quite popular in financial media. This demonstrates the S&P “decoupling” with the Smart Money Flow Index. Of course, the chart is an optical illusion that tries to convince you why stocks will crash and “reconnect” with the Smart Money Flow Index.

*Click here to learn more about the Smart Money Flow Index

And once again, this is nothing more than an optical illusion used by financial marketers. Here’s a long term chart of the Smart Money Flow Index.

As you can see, the S&P and Smart Money Flow Index “decouple” all the time. These “divergences” can last for years, if not decades. When a “divergence” lasts for years, it’s not called a divergence. It’s called “useless”.

Here’s the S&P “decoupling” from the Smart Money Flow Index throughout the entire 1960s.

Here’s the S&P “decoupling” from the Smart Money Flow Index from 2003-2006.

Not consistently useful as a sell signal.

Dow Transportation Index

The Dow Jones Transportation Index has fallen 10 days in a row, which means that it’s much weaker than the Dow Jones Industrial Average.

Historically, these losing streaks were short term bearish for the Dow Jones Transportation Index over the next month.

Reversal pattern

Based on pattern and chart analysis, the S&P 500 seems to have made a bearish reversal pattern. The S&P gapped up on Monday, closed down, and then fell 3 days in a row.

Is this really bearish, as the textbooks suggest?

No. Similar historical cases were mostly random for the S&P in the short term, but bullish 6-12 months later.

Technical analysis

I spend a lot of time scouring the internet and books to see what’s popular in trading and finance. This is the best way to learn. See what’s popular, see what others are doing, and then do your own testing to see if what you learned actually works. (You’d be surprised to learn that most of what’s taught popular is no better than a 50/50 coin toss). Even better, improve on the work of others.

  1. Keep what works.
  2. Discard whta doesn’t work.
  3. Improve what works.

The NYSE McClellan Summation Index fell below its 20 dma today for the first time in 2 months. Traditional technical analysis sees this as a “weakening breadth SELL signal”. Is it?

Here’s what happens next to the S&P when the NYSE McClellan Summation Index falls below its 20 dma for the first time in 2 months.

*Data from 1998-present

The S&P’s forward returns are mostly random, aside from a slight 1 week bearish lean. This “bearish pattern” isn’t so bearish after all.

Moral of the story, don’t use a strategy/indicator just because it’s popular. As a mentor used to say, would you jump out of a window just because your friend jumped out of the window?

Click here for yesterday’s market analysis

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimistic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (e.g. next 6-9 months) is more bullish than 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