Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Stock Market’s Volatility is Very High. What’s Next

Stock-Markets / Stock Markets 2018 Oct 28, 2018 - 03:54 PM GMT

By: Troy_Bombardia

Stock-Markets

What a week for the U.S. stock market. Conventional technical analysis would have you believe that “the world is ending” because trendline support has been broken.


We disagree. Trendlines and support/resistances have too many false breakouts and breakdowns.

*Let’s analyze the stock market’s price action by objectively quantifying technical analysis. For the sake of reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

Volatility soared: medium term bullish for stocks

Volatility is mean-reverting.

  1. When volatility is extremely low, it tends to spike.
  2. When volatility is extremely high, it tends to fall.

Volatility is extremely high right now. The S&P’s 20 day Bollinger Bands have expanded by more than 5.5x in the past 3 weeks.

Here’s what happens next to the S&P 500 (historically) when its 20 day standard deviation (used in Bollinger Bands) expands by more than 5.5x in 3 weeks.

Yes, a lot of these historical cases are overlaps. But more importantly:

  1. Every single case saw the stock market higher 1 year later.
  2. Most cases saw the stock market higher 9 months later (the 3 bearish cases saw small losses).

These signals are clustered in 1982, AFTER the 1987 crash, 1992, 1995, 2014, and 2015.

Volatility is mean-reverting, and it moves in the opposite direction of the stock market.

Short term will likely remain choppy

The short term (i.e. next few weeks) will most likely remain volatile. It is neither decisively bullish nor bearish right now.

The S&P has gone up or down more than 1% in at least 8 of the past 13 days. Historically, this led to more volatility in forward returns.

Meanwhile, the S&P’s 5 weekly RSI is extremely low. It is now at 13.

Here’s what happens next to the S&P 500 (historically) when its 5 weekly RSI falls below 14 for the first time in 3 months (i.e. right now).

As you can see, the S&P tends to:

  1. Make a short term bounce over the next few days, then..
  2. Lower low in the next 2-3 months (i.e. RSI divergence).

I wouldn’t worry about this too much. Looking at the data, it’s clear that a lot of these cases happen AFTER the stock market has already crashed 30%+. With the stock market down -10% right now, the context is clearly different. Context matters.

Regardless, this suggests more short term volatility.

In similar fashion, the S&P has fallen at least 20 of the past 26 days. That’s a lot of “down” days in such a short period of time. Historically, this led to a:

  1. Bounce over the next week
  2. Lower low in the next 2 months before bottoming.

And lastly, the S&P is now more than 2.3 standard deviations below its 20 weekly moving average.

On the surface this seems immediately short term bullish for the stock market.

But the data disagrees.

Here’s what happens next to the S&P 500 when it falls more than 2.3 standard deviations below its 20 weekly moving average (i.e. falls below its lower Bollinger Band).

The stock market’s short term forward returns tend to be volatile.

Conclusion

Our discretionary outlook remains the same:

  1. The current bull market will peak sometime in mid-2019.
  2. The medium term remains bullish (i.e. trend for the next 6-9 months). Volatility is extremely high right now. Since volatility is mean-reverting and moves in the opposite direction of the stock market, this is decisively medium term bullish.
  3. The short term is a 50-50 bet right now. Moreover, the stock market will probably remain volatile in the short term (big up and down swings). 
  4. When the stock market’s short term is unclear (as it is most of the time), focus on the medium term. Step back and look at the big picture. Don’t lose yourself in a sea of noise.

Our discretionary outlook is usually, but not always, 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 2018 © 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.


© 2005-2022 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