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
US Bond Market Yield Curve Patterns – What To Expect In 2020 - 25th Feb 20
Has Stock Market Waterfall Event Started Or A Buying Opportunity? - 25th Feb 20
Coronavirus IN Sheffield! Royal Hallamshire Hospital treating 2 infected Patients, UK - 25th Feb 20
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Did the Stock Market Just Make the Mother of All Bull Traps?

Stock-Markets / Stock Markets 2019 Jun 02, 2019 - 06:29 PM GMT

By: Troy_Bombardia

Stock-Markets

The S&P is now down -6.5% from its all-time high, after making a marginal new high vs. its September 2018. On the charts, this “looks like” a bull trap. Is it really? Today’s headlines:

  1. Examining the “bull trap”
  2. Collapsing Treasury yields, and what this means for stocks
  3. SKEW’s decline
  4. Dow has fallen 6 weeks in a row
  5. Copper and stocks both down 4 weeks in a row
  6. First monthly decline after a 4 month rally
  7. Emerging markets outperforming the U.S.

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.

Bull trap

After briefly making a new all-time high, the S&P is now down -6.5%. This “looks” terrible on a chart, because it looks like a false breakout.

But is this actually bearish? Is it normal for the S&P to fall approximately -20%, make a marginal new high, and then immediately fall again?

Let’s look at similar historical cases over the past 50 years.

Here’s every case in which the S&P makes a -15% to -20% correction, makes a marginal new high of less than +4%, and then immediately falls more than -4%. Use daily CLOSE $

For reference, the current case saw the S&P fall -19.6%, make a 0.6% new high, and then fall -6.5%

2015-2016

The S&P fell -14.16%, made +2.7% new high, and then fell -4.7%. Eventually the bull market resumed.

2011

The S&P fell -19.38%, made +4.06% new high, and then fell -9.92%. Eventually the bull market resumed.

1998

The S&P fell -19.33%, made +0.4% new high, and then fell -4.22%. Eventually the bull market resumed.

1976-1979

The S&P fell -19.41%, made +3.59% new high, and then fell -10.24%. Eventually the bull market resumed.

1966

The S&P fell -22.17%, made +0.55% new high, and then fell -6.5%. Eventually the bull market resumed, but did not last for long.

Conclusion

It is perfectly normal for the S&P to fall -15% to -20%, make a marginal new high, and then make a pullback/correction. The recent crash is fresh in investors’ minds, and with everyone thinking “is this just like the previous crash all over again”, their recency bias can become self-fulfilling.

Moreover, this is not usually how bull markets end. Bull markets don’t usually end with a massive -15% to -20% decline and then a marginal new high.

But MOST IMPORTANTLY, “bull traps” aren’t that reliable. They are only “bull traps” with 20/20 hindsight. In real-time, the probability that a bull trap will be the bull market’s top is a 50/50 coin toss.

Collapsing Treasury yields, and what this means for stocks

Treasury yields are falling along with the U.S. stock market. The 10 year Treasury yield is now more than -23% below its 200 day moving average (oversold).

Here’s what happens next to the S&P when the 10 year yield is more than -23% below its 200 dma.

Here’s what happens next to the 10 year Treasury yield.

You can see that both stocks and interest rates tend to bounce 1-2 months later.

Similarly, the 30 year Treasury yield has also collapsed. It is now -15% below its 200 dma.

A collapse in the 30 year Treasury yield is mostly bullish for stocks, and bullish for the 30 year Treasury yield 9 months later.

SKEW

The SKEW Index measures financial risk. It tends to move inline with the S&P because:

  1. As the stock market rises, the probability of a decline/crash increases.
  2. As the stock market falls, the probability of a further decline/crash decreases.

Whereas stocks have gone up over the past 5 months, SKEW has fallen.

Such a divergence between the S&P and SKEW is mostly bullish for stocks 2 months later.

Dow falling 6 weeks in a row

The Dow has fallen 6 weeks in a row.

From 1900 – present, the Dow tends to go up next week 77% of the time.

*The short term is always extremely unpredictable, no matter how much conviction you have. Trade war news only adds to this short term uncertainty.

With that being said, what’s uncommon is that the Dow has fallen 6 weeks in a row while still within -10% of an all-time high. Most of these “down 6 weeks in a row” streaks happen AFTER the stock market is already in a bear market.

Historically, this is more bearish than random 6-12 months later.

Copper and stocks both down 4 weeks in a row

Commodities and stocks are moving together right now. Both copper and the S&P have fallen 4 weeks in a row.

Historically, this combination of copper and stocks falling together is more bearish for copper than stocks.

First monthly decline

It’s important to put the recent stock market decline into context.

The S&P rallied 4 months in a row from January – April, and has now fallen in May.

Here’s what happens next to the S&P when it rallies 4 months in a row, and then falls during the 5th month.

Emerging markets

And lastly, here’s a quick look at emerging markets and China. While the U.S. stock market continues to fall, emerging markets and China haven’t fallen much more beyond their early-May plunge.

This probably has to do with the Chinese government’s massive injection of liquidity. You’ll notice that the same thing happened last year during the Q4 crash. U.S. stocks crashed, Chinese and emerging market stocks were mostly flat.

So does this mean that “it’s October-December 2018 all over again?”

Here’s what happens next to the S&P when it falls more than -3% over the past 7 days, while EEM (emerging markets ETF) goes up.

Slightly more bearish than random for the S&P on all-time frames.

However, this is usually worse for emerging markets.

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.

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
  2. Most of the medium term market studies (e.g. next 6-12 months) are bullish, although a few of trend following studies are starting to become bearish.
  3. Market studies over the next 1-2 weeks are mixed (some bullish and some bearish). This indicates no clear edge right now. Trade war news only adds to this uncertainty.
  4. HOWEVER, our market studies for the next 1-3 months are starting to turn more bullish.
  5. We focus on the medium-long term.

Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.

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