Is the stock market making a quadruple top?

by Troy

It’s been a strong half year for a traditional 60/40 portfolio (60% long stocks, 40% long bonds). Meanwhile, the stock market continues to face the same resistance since January 2018. Today’s headlines:

1. In a rare occurrence, both stocks & bonds are having a great year
2. Traditional 60/40 portfolio compared to buy and hold stocks
3. Is the stock market making a quadruple top?
4. REIT’s sudden decline
5. Silver set to outperform gold?
6. Bitcoin is soaring

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.

A great year so far

From CNBC:

CNBC is correct in saying that bonds and stocks have had a great year so far. Here’s the S&P 500 (orange) vs. Bloomberg Barclays U.S. Aggregate Bond Index (blue).

*Bloomberg Barclays Aggregate Bond Index combines corporate bonds and Treasury bonds.

Is this rare occurrence bullish or bearish? Here’s what happens next to the S&P when it rallies more than 15% over the past half year while Aggregate Bonds rally more than 5%.

Here’s what happens next to Aggregate Bonds.

Mostly bullish for both bonds and stocks.

60/40 portfolio

Speaking of stocks and bonds, the 60/40 portfolio continues to push towards new highs.

Over the past 40+ years, a 60/40 portfolio has returned approximately the same as buy and hold for the S&P 500, but with smaller drawdowns (see 2000-2002 and 2007-2009 bear markets). Of course, this is partially due to a 40 year bull market in bonds.

Here’s the 60/40 portfolio on a log scale

Is the stock market making a quadruple top?

When many traders look at the Dow’s chart, they wonder “is the stock market making a quadruple top?” As Tiho Brkan pointed out, quadruple tops are rare.

Let’s take a look at major bull market peaks in the past.

Here’s 2007: no quadruple top.

Here’s 2000: multiple tops

Here’s 1973: no quadruple top.

Here’s 1968: no quadruple top.

Here’s 1937: no quadruple top.

Here’s 1929: no quadruple top.

Bottomline: tops come in many different patterns. While a quadruple top is rare, it is not impossible (see 2000). I don’t place a high reliance on chart patterns. For example, if someone in 2000 said “the stock market can’t top right now, there has never been a quadruple top before”, they would have been wrong. There’s a first time for everything, especially when the sample size is low.

REITs sudden decline

The REIT etf RWR has dropped significantly over the past 4 days after making a new all-time high.

These sudden declines can lead to more selling in the short term for RWR…

… and is not a bullish short term sign for the S&P.

Gold:silver ratio

The gold:silver ratio has surged recently as silver continues to underperform gold.

As a result, gold:silver ratio’s 14 week RSI is extremely high. Here’s what happens next to gold when the ratio’s RSI exceeds 75

Here’s what happens next to silver.

Silver tends to do better than gold over the next 3 months, suggesting a mean reversion in the ratio.

Bitcoin

And lastly, the chart you’ve all been waiting for. Bitcoin has soared recently, and its daily RSI is now above 85.

While such high momentum readings “eventually” lead to a correction, more often than not Bitcoin surges in the year ahead. Perhaps Tom Lee’s prediction that Bitcoin will “easily soar to $40,000” isn’t outlandish. In the land of crypto, anything is possible.