Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
If You Don’t Understand Bonds, You Don’t Understand Investing - 25th Aug 19
Gold's Next Move - 25th Aug 19
Fresh Water Crisis Unfolding - 25th Aug 19
Newbie Guide to Currency Pairs in Forex Trading – Review - 25th Aug 19
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

The S&P 500 is Now Wown -15%. What’s Next for Stocks

Stock-Markets / Stock Markets 2018 Dec 20, 2018 - 10:02 AM GMT

By: Troy_Bombardia

Stock-Markets

The S&P 500 is now down approximately -15%


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, week, or month.

*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are walking blindly into the future.

How bear markets start

If this is just a -15% or -20% decline, then you would obviously want to be a buyer here. Downside risk is approximately -5%, and the upside is much higher. Think risk:reward

But what you are afraid of is “is this the start of a -30% to -50% decline?” If the stock market tanks -30% and you buy here, your long position will get killed.

Let’s take a look at the previous 30%+ declines that lasted at least 1 year.

Here’s the 2007-2009 bear market. The S&P fell 20%, and then made a >50% retracement rally

Here’s the 2000 – 2002 bear market. The S&P fell 16.4%, and then made a 50% retracement rally.

Here’s the 1981 – 1982 decline. The S&P fell 22.3%, and then made a 50% retracement

Here’s the 1973 – 1974 bear market. The S&P fell 18%, and then made a 50% retracement rally.

Here’s the 1969-1970 bear market. The S&P fell 18.3%, and then made a 50% retracement rally.

So what do you see?

If this is indeed the start of a 30-50% decline, then the stock market tends to make a big 50% retracement rally after the S&P falls -15% to -25%

The S&P is currently down -15%

Know which side risk:reward supports

Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.

Mean reversion

The S&P 500 is now down more than -15% over the past 3 months, while within 25% of a 2 year high.

Historically, the stock market’s forward returns when this happened were random, with a slight bearish lean over the next 1 week. Why?

Because the rally might last 1 month, 2 months, 3 months, or God-knows how many months. TIME is not the important factor here. Magnitude is the important factor, and the mean-reversion bounce typically retraces 50%.

Terrible December

This has been one of the worst Decembers over the past 100 years. The S&P is down -9.8%, which is unusual because December is seasonally bullish. (As I have said in the past, seasonality works until it doesn’t. Seasonality factors are of secondary importance.)

Here’s what happened next to the S&P when it fell at least -9.8% in December (December’s LOW vs. November’s CLOSE)

*Data from 1900 – present

As you can see, the stock market typically makes a 1-3 month rally (standard time for a bear market rally), and then it goes down.

Interesting VIX

VIX has been extremely interesting during the course of the S&P’s -15% decline. VIX is flat, while the S&P is down much more.

But here’s a more interesting point. VIX was completely flat today while the S&P tanked -1.5%. Is this a bullish sign for stocks?

Here’s what happened next to the S&P when the S&P fell more than -1.5%, while VIX was flat/down

*Data from 1990 – present

Note that even in bear markets, the S&P tends to rally 2 weeks later.

Here’s what happened next to VIX when the S&P fell more than -1.5%, while VIX was flat/down

Russell

Small cap stocks are down the most during the S&P’s -15% decline. The Russell 2000 index (small caps) are now down -20%

Here’s what happened next to the Russell when it fell more than -20% in the past 3 months.

*Data from 1980 – present

Here’s what happened next to the S&P 500 when the Russell fell more than -20% in the past 3 months.

As you can see, the stock market tends to bounce over the next 1 month.

Dow’s death cross

Lost in the stock market’s recent decline is the fact that the Dow has made a “death cross”, whereby its 50 day moving average fell below its 200 day moving average.

Here’s every single death cross for the Dow from 1900 – present, and what the Dow did next

Historically, when the Dow made a death cross, it had a slight bearish lean over the next 1 month, after which forward returns were no different from random.

Click here for yesterday’s market studies

Conclusion

Here is our discretionary market outlook:

  1. For the first time since 2009, the U.S. stock market’s long term risk:reward is no longer bullish. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward.
  2. The medium term direction is still bullish  (i.e. trend for the next 6 months). However, if this is the start of a bear market, bear market rallies typically last 3 months. They are shorter in duration.
  3. The short term is a 50/50 bet

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, 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.


© 2005-2019 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