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

Long Awaited Stock Market Pullback has Finally Arrived

Stock-Markets / Stock Markets 2019 Mar 11, 2019 - 05:11 PM GMT

By: Troy_Bombardia

Stock-Markets

It was a tough week for the U.S. stock market, with the S&P falling 5 days in a row. The S&P is finally starting to make a somewhat sizable pullback, although this pullback happened later than we expected. Most pullbacks are start at the 50% retracement level – this one started at the 78.6% level, which proves that the short term is always extremely hard to predict.


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.

Jobs Report

Today was Jobs Report day. Non-farm payrolls saw the biggest “miss” in expectations since 2008. Via another metric, non-farm payrolls saw the 2nd biggest monthly decline since 2008. Nonfarm payrolls growth fell -291k

While this may sound scary (anything with the world “financial crisis” or “2008” sounds scary), it isn’t.

Nonfarm payrolls is a notoriously noisy data series.

Monthly declines in Nonfarm Payrolls growth that exceeds -250k happens all the time.

This happened 25 times from 1970 – present, and the S&P 500’s forward returns are no different from random.

Housing Starts

The latest reading for Housing Starts spiked from the previous reading. But more importantly, Housing Starts is still below its 12 month moving average. (The trend in economic data is always more important than individual data readings).

I came into this study expecting this factor to be bearish for the stock market. A lot of the biggest spikes in Housing Starts occur around a recession, when the economy is very volatile and Housing Starts is in a downtrend (i.e. below its 12 month moving average).

Surprisingly, the data suggested otherwise.

Here’s what happens next to the S&P when Housing Starts jumps more than 15% in one month, while it is still under its 12 month moving average.

This is mostly bullish for stocks 9-12 months later. Even during bear markets, this often occurred towards the end of a bear market and economic recession.

Bearish engulfing pattern

I’m not a big fan of chart patterns, but these are popular among traders. The S&P 500 printed a rare bearish engulfing pattern this week.

The S&P’s OPEN this week exceeded the highest HIGH over the previous 2 weeks, and the S&P’s CLOSE this week was lower than the lowest LOW over the previous 2 weeks. Textbook candlesticks called this a “bearish engulfing pattern”.

From 1950 – present, this has only happened 3 other times. It was indeed more bearish than bullish for the stock market going forward, but it’s hard to draw conclusions from a sample size of n=3

Insider selling

According to Bloomberg, corporate insiders have once again stepped up their selling. Simple contrarian analysis would automatically assume that this is bearish for stocks, but I wouldn’t. Just from a quick cursory glance, it’s clear that corporate insiders can be wrong. E.g. insiders sold a lot in early-2017.

Generally speaking, there is no such thing as “smart money” or “dumb money” in the stock market. If the “dumb money” is too numerous, it can overpower the “smart money”. (This is also why sentiment is more useful and accurate at picking stock market bottoms than stock market tops).

Dow getting rare

The Dow Jones Transportation Index is now down 11 days in a row. Historically, the Dow Transportation Index’s forward returns were quite bearish.

Examine these dates more closely and you can see that all of these were late-cycle dates.

  1. May 1972: 7 months before the bull market top
  2. 1966-1968: less than 2 years before the bull market top
  3. September 1930: in the middle of the 1929-1932 crash.

It seems that transports are leading the way down. Late-cycle

USD

The USD Index is making new highs, and is now up more than 8% over the past year. Meanwhile, the S&P 500 has gone nowhere.

Here’s what happened next to the S&P when the USD Index goes up 8%+ over the past 52 weeks while the S&P falls.

As you can see, this is a short term bearish factor for the S&P over the next 1 month

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 market outlook is not 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 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