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
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Recession Probabilities Continue to Increase: What’s Next for Stock Market

Stock-Markets / Stock Markets 2019 Jun 05, 2019 - 12:49 PM GMT

By: Troy_Bombardia

Stock-Markets

The stock market rallied above its 200 day moving average today along with Fed-related news. Today’s headlines:

  1. The New York Fed’s Recession Probability Model continues to increase
  2. Today’s spike saw relatively low volume
  3. Stocks spiked, but VIX didn’t fall significantly today
  4. 30 year – 2 year Treasury yield is steepening
  5. PMI and the S&P are both falling
  6. Zahorchak Method isn’t falling

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.

New York Fed Recession Probability Model

The New York Fed has a Recession Probability Model that uses the 10 year – 3 month Treasury yield.

Here’s the model, which is currently above 29%

Here’s what happens next to the S&P when the probability of a recession exceeds 29%, according to the New York Fed’s model.

Long term forward returns are less bullish than random. This is a late-cycle sign. Let’s examine some of the cases.

February 2006: bull market and economic expansion continued for another 1.5 years

July 2000: bull market already over

June 1989: economic expansion continued for another 1 year, followed by a -20% decline in the stock market

November 1978: economic expansion continued for more than 1 year, followed by a recession and a -20% stock market decline.

June 1973: A bear market had already begun

Either way, this is late-cycle. Would I use this for trading?

No. The yield curve is just one of many macro points to consider.

Today’s spike saw relatively low volume

While the S&P spiked more than 2% today, SPY’s volume was less than its 1 year average. (SPY = S&P 500 ETF).

Is this normal? Should sustainable spikes see more volume?

Here’s what happens next to the S&P when SPY surges more than +2% and is above its 200 dma, but volume is more than -15% below its 1 year average.

Mostly bullish 3 months later.

VIX’s muted reaction

While the S&P rallied more than 2% today, VIX fell less than -11%. This is uncommon, because big 1 day S&P rallies usually lead to a bigger VIX decline. A 2% S&P rally usually = a -20% to -30% VIX decline.

Here’s what happens next to the S&P when VIX falls less than -11%, while the S&P rallies more than 2% and is above its 200 dma.

Once again, mostly bullish for the S&P 3 months later.

30 year – 2 year Treasury yield is steepening

While the 10 year – 3 month yield curve has been pushing deeper into inversion over the past few months, longer term parts of the yield curve have been steepening (e.g. 30 year – 5 year and 30 year – 2 year).

Here’s what happens next to the S&P when the 30 year – 2 year yield curve steepens by more than 0.3% over the past 190 days, while the S&P falls

What if we only want to look at late-cycle cases, in which unemployment is under 6%?

What if we want to shrink the parameters even more and only look at cases in which Unemployment is under 5%?

In a best case scenario, this bull market has 1 year left

ISM manufacturing PMI

In terms of macro, the 3 main weak points center around:

  1. Yield curve
  2. Trade-related sectors (trade war)
  3. Manufacturing

The other macro sectors are decent.

The ISM manufacturing PMI has been falling over the past 9 months.

I usually dislike these charts because “divergences” don’t mean much. The PMI by definition spends half of its time going up and half of its time going down. Since the stock market goes up > 50% of the time, most “divergences” aren’t useful as timing indicators.

However, there is something to be said about a deterioration in the PMI while the S&P is also going down. In other words

  1. Not every decline in PMI is bearish for stocks
  2. But when PMI and stocks decline together, that is not a bullish sign

Here’s what happens next to the S&P when PMI falls more than -8 over the past 9 months, while the S&P also falls more than -5%

Manufacturing remains a weak point for macro over the next 6 months.

Zahorchak

The Zahorchak Method is a trend following indicator that combines price action trend following with breadth.

With the S&P falling over the past few weeks, you would expect that the Zahorchak Method falls as well. It hasn’t.

Is this a bullish factor for the S&P?

Here’s what happens next to the S&P when it falls more than -4% over the past 4 weeks, while the Zahorchak Method is still at 10.

*The latest reading “5/27/2019” is as of last Friday’s close.

Slightly more bullish than random over the next few weeks.

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 6-9 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). 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 analysis

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.

Troy Bombardia Archive

© 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