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
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
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

So Many Things are Not Confirming Stock Market Rally

Stock-Markets / Stock Markets 2019 Feb 20, 2019 - 01:22 PM GMT

By: Troy_Bombardia

Stock-Markets

A lot of things are not “confirming” the stock market’s rally right now.

Standard traders look for “non-confirmations” in the market. They typically plot a fundamental/technical indicator ontop of the S&P 500, demonstrate how the 2 lines have mostly had a strong correlation over the past 2 years, and then demonstrate how the S&P has “diverged” from the indicator recently and how the indicator is not “confirming” the stock market’s rally.

Then, they come to the conclusion that the stock market is going to reverse because “DIVERGENCE!”

In reality, most divergences don’t amount to anything and are not much better than a 50/50 coin toss. These correlations are optical illusions, and work until they don’t.


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.

Non-confirmation

Baa corporate bond spreads widened when the stock market crashed in Q4 2018. Now that the stock market is rallying, corporate bond spreads are not narrowing significantly.

Seeing that Baa spreads and the S&P have mostly had a positive correlation from 2016 – present, some prominent traders are seeing this divergence as a bearish sign of “non-confirmation”.

Is it really?

Here’s what happens next to the S&P when the S&P rallies more than 15% over the past 38 days, while Baa spreads narrow by less than -0.1

*Data from 1986 – present

This occurred in:

  1. now
  2. 2009
  3. 1998
  4. 1997
  5. 1986

More bullish than bearish for stocks. Just because there’s a divergence or “non-confirmation”, doesn’t make it useful.

The epic clash between bonds and stocks

In another sign of “non-confirmation”, Treasury yields are not “confirming” the stock market’s rally. Bond yields are falling while stock prices are rallying.

Once again, this “divergence” and “non-confirmation” is not actually bearish for stocks

Here’s what happens next to the S&P when it rallies more than 15% over the past 38 days while TNX (the 10 year yield index) falls more than -3%

*Data from 1962 – present

Once again, more bullish than bearish for stocks 3-12 months later.

…And also more bearish than bullish for Treasury yields 9-12 months later

Low VIX RSI

As of last Friday, VIX’s 5 weekly RSI is oversold (below 30), after being overbought within the past 3 months

Is this a bad sign for the stock market?

Here’s what happens next to the S&P when VIX’s 5 weekly RSI falls under 30, after being above 70 within the past 3 months

It is indeed a short term bearish sign for stocks. But 9-12 month forward returns are more bullish than random.

Here’s what happens next to the VIX

This is a short term bullish sign for VIX

Breadth

A quick reminder of breadth.

Breadth remains strong, with more than 90% of the S&P 500’s stocks above their 50 dma

Here’s what happens next to the S&P when more than 90% of S&P 500 stocks are above their 50 dma

*Data from 2002 – present. Since the data is limited, take this with a grain of salt.

As you can see, this is quite bullish for stocks 3-12 months later.

Dow Bollinger Band

The Dow Jones Industrial Average has hit its upper Bollinger Band for the first time since September 2018. Is this a bearish factor for the Dow, as standard technical analysis suggests?

Here’s what happens next to the Dow when it closes above its upper Bollinger Band for the first time in 3 months, while above its 200 dma.

As you can see, not consistently bearish for stocks on any time frame.

Click here for yesterday’s market study

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 optimstic 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 (i.e. next 6 months) is mostly neutral. There are a few more medium term bullish studies than medium term bearish studies
  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.


© 2005-2022 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