Has the stock market been making a flat top for more than 1 year?

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Sometimes it’s worth zooming out on your charts to look at the bigger picture. On a monthly chart, it “looks like” the S&P is making a big flat top. The S&P has gone up less than 60 points in the past 15 months.

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.

Flat top

So is the stock market making a big flat top? Let’s look at the data.

From 1923 – present, here’s what happens next to the S&P when it goes up less than 4% over the past 15 months, while at a 2 year high.

You can see that this is rare. In the past, this isn’t how bull markets ended. Here are the historical cases.

You can see that the last 15 months of prior bull market tops were different. They weren’t completely flat.

The historical cases all ramped up towards the end of the bull market and collapsed. They didn’t ramp up (e.g. 2017) and then linger at the top for another 1+ year.

Trade volume

The economy drives corporate earnings, which determines the stock market’s long term direction.

From Bloomberg

So just how bad is this? Let’s look at the complete Global Trade Volume data from 2001-present.

You can see that this isn’t good. Here’s what happens next to the S&P when the 1 year % change in global trade’s 3 month average falls below -0.5%

You can see that this occurred during the 2000-2002 and 2007-2009 bear markets.

So does this mean that today is “2001 and 2008 all over again”? I don’t think so.

Economic data is best to be taken as an aggregate. At any given point in time, there will always be thousands of bullish economic indicators and thousands of bearish indicators. We must look at the aggregate data to avoid cherry picking whatever suits our bias. And right now, aggregate U.S. economic data is still decent.

The slowdown in global trade volume is mostly linked to ex-U.S. weakness than U.S. weakness. Ned Davis Research has a “global recession probability model”.

*Recession in grey

Seems horrible, doesn’t it? “Global recession probability at 96%!” Except you’ll soon realize that the “global economy” spends almost half of its time in a “recession” (yet somehow the world is still better today than where it was 40 years ago). I guess it proves Zerohedge’s tagline: “there’s always bad news somewhere in the world”.


Last week we highlighted

AAII sentiment is one of the most widely followed sentiment indicators for the U.S. stock market.

AAII breaks down sentiment into 3 parts: Bullish %, Bearish %, and Neutral % (neither bullish nor bearish).

Neutral % keeps rising along with the stock market rally! This isn’t very common. In most cases, price moves sentiment. So as the market keeps going up, more and more investors become bullish simply because the price has been going up in the recent past (recency bias again).

This demonstrates that many investors are in disbelief of the recent rally.

AAII Neutral % increased again this weak.

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Here’s the complete AAII Neutral % chart.

From 1987 – present, this is the first time in which the S&P rallied more than 15% over the past 4 months while AAII exceeds 45%.

So the only way to examine this from a quantitative perspective is to loosen the parameters. Here’s what happens next to the S&P when it rallies more than 10% over the past 4 months while AAII Neutral exceeds 40%.

Investor disbelief is a feature of strong rallies.

No pullbacks

It’s quite amazing how persistent this post-correction rally has been. With the S&P up more than 20% over the past 4 months, there have only been 4 days in which the S&P fell more than -1%. Historical post-correction rallies are often quite violent, with many -1%, -2%, and -3% days.

For example, compare today…

With 2011….

First we can look at all the cases in which the S&P rallied more than 20% over the past 4 months.

Then we can focus on the ones in which there were 4 or less days in which the S&P fell more than -1% over those 4 months.

Rare, but not unprecedented.

Anyways, it’s been an exceptional 4 months.


A few days ago we highlighted that while the NASDAQ is at an all-time high, fewer than 50% of NASDAQ stocks are above their 200 dma. And to our surprise, this wasn’t a bearish sign for the NASDAQ.

While less than 50% of NASDAQ stocks are above their 200 dma, more than 74% of the S&P stocks are above their 200 dma (so at least breadth is ok for one of these 2 indices).

It seems that there is a divergence between the S&P’s and NASDAQ’s breadth. Is this bearish?

Here’s what happens next to the S&P when the S&P is at a 2 year high, while more than 70% of S&P stocks and less than 50% of NASDAQ stocks are above their 200 dma.

Rare, but not consistently for stocks.

What if we look at the % of stocks above their 50 day moving averages?

Same divergence.

And once again, rare but not consistently bearish for stocks in the medium-long term.

Dangers of shorting

And lastly, I would like to warn readers on the dangers of shorting.

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There’s a small hedge fund (who shall go unnamed) that’s quite popular on Twitter and financial media because they’ve been vocally bearish and shorting the U.S. stock market since 2016 (bad news is always popular on Twitter).

Their thesis – stocks are overvalued.

They lost -20% in 2017, made 40% in 2018, and now lost -20% again. Overall, -10% while the S&P is up +30%

The point isn’t to pick on them. The point is to illustrate how hard it is to make money on the short side. While the long/short versions of our trading models do outperform the long-only versions of our trading models, the outperformance is not significant. Moreover, most short positions lose money simply because bull markets can last longer than most people think. Even Jim Chanos – the king of shorting, actually makes more money on the long side than short side. Shorting mostly smoothes out his equity curve.

The secret to Chanos’s longevity as a short-seller is Kynikos’s flagship fund, the vehicle where Kynikos partners invest, which was launched alongside Ursus in 1985. Kynikos Capital Partners is 190 percent long and 90 percent short, making it net long. Unlike most long/short hedge funds, however, the longs are primarily passive, using such instruments as exchange-traded funds, as the intellectual effort goes into the short side.

It’s one thing to not making money (sit on the sidelines) while everyone else is making money. It’s another thing to lose money while everyone else is making money.

Don’t be the bear who finally gets it right after 100 tries. In honor of the new Avengers movie:

For those who have been in this business long enough, you will remember how many legendary hedge funds and investors like Julian Robertson blew up by shorting the dot-com bubble. The market can remain irrational (if you think it’s “irrational”) longer than you can remain insolvent.

Read Are the stock market’s internals sending bearish warnings?


Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimistic 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 (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
  3. We don’t predict the short term because the short term is always extremely random, no matter how much conviction you think you have. Focus on the medium-long term.

Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.



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