Risk:Reward over the next few months Doesn’t favor Stock Market Bulls
Stock-Markets / Stock Markets 2019 Jul 24, 2019 - 01:22 PM GMTBy: Troy_Bombardia
The past 7 months saw stocks and bonds surge together (bond yields fell). With stocks trending sideways, bond yields are also bottoming. Today’s headlines:
- Yield curve un-inverted
- Leading indicator for the economy & industrial production
- Put/Call ratio tanked
- Consumer Staples surge
- This defensive sector is no longer outperforming
- Silver’s golden cross
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.
Yield curve
The popular 10 year – 3 month yield curve has turned positive after being inverted for 40+ consecutive days.
A steepening yield curve is typically more worrisome than an inverted yield curve. The yield curve tends to steepen in a recession, whereas the yield curve can be inverted 1-2 years before a recession.
Here’s what happened next to the S&P when the yield curve turned positive for the first time in more than 40 days.
Overall, the yield curve remains a long term bearish sign for stocks.
Chemical Activity Barometer
The Chemical Activity Barometer is a leading indicator for Industrial Production. Industrial Production is commonly watched to gauge the health of U.S. manufacturing, and hence the U.S. economy.
The following chart from Bill McBride demonstrates that this leading indicator is still negative year-over-year.
*I highly recommend Bill McBride’s site to anyone who wants to learn how to properly understand macro.
Historically, this was not too good for the S&P over the next 6 months.
Put/Call
The Put/Call ratio tanked today as the stock market rallied. It is now more than -23% below its 200 dma.
*We use the Put/Call ratio’s distance from its 200 dma because the Put/Call ratio’s long term average changes over the years.
Historical cases were more bearish than random over the next 3 months.
Consumer staples
Consumer staples have been on fire over the past 7 months. XLP (consumer staples ETF) has rallied nonstop. Its rally has been even less volatile than the S&P’s rally.
There are only 3 other historical cases that saw XLP rally this much in 7 months. One of them was September 2000. XLP did quite well in the 2000-2002 equities bear market.
Defensive sector
XLU (utilities) outperformed since the October 2018 selloff. But now that outperformance is coming to an end, with the XLU:S&P ratio below its 200 dma for the first time in since October.
Historically, this wasn’t too good for stocks over the next 1-2 months.
Silver
Silver is about to make a golden cross, whereby its 50 dma crosses above its 200 dma.
More often than not,the golden cross doesn’t immediately work out. Silver’s 1 month forward returns are more bearish than random.
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:
- Long term: risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
- Medium term (next 6-9 months): most market studies are slightly bullish.
- Short term (next 1-3 months) market studies lean bearish.
- We focus on the medium-long term.
Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward favors long term bears.
Click here for more market analysis
Here’s what happens next to the S&P when lumber rallies above its 50 week moving
By Troy Bombardia
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.
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