Is the S&P 500 making a very bearish pattern right now?

via Troy:

After a big 5 day rally, the stock market is stalling. Today’s headlines:

1. Canary in the coal mine: small caps underperforming large caps
2. NASDAQ’s breadth
3. Interest rate cuts
4. Crash pattern
5. Job openings
6. Tech’s surge

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.

Canary in the coal mine?

While small caps outperformed large caps in the initial part of this December 2018 – present rally, small caps have underperformed recently.

The S&P has outperformed the Russell by more than 2.5% since December 24. Is this a “canary in the coal mine”?

Here’s what happens next to the S&P when both the Russell and S&P rally more than 10% in the past 116 days, but the S&P outperformed the Russell by more than 2.5%

Not a “canary in the coal mine”, particularly 3-6 months later.

NASDAQ breadth

The NASDAQ McClellan Summation Index (breadth) has gone up for 2 consecutive days after falling more than 21 consecutive days (1 month) in a row.

This is the end of a long streak in which the NASDAQ McClellan Summation Index fell.

Historically, this was a bullish factor for the NASDAQ 3 months later.

First rate cut

Market participants expect the Fed to cut rates sometime this year.

The common belief is that the Fed’s first rate cut tends to be bearish for the stock market, because the Fed tends to cut as the economy slides into a recession.

Bloomberg had an interesting chart that challenges this assumption.

While the previous 2 “first rate cuts” have been quite bearish (2001 and 2007), the other ones were mostly bullish.

Should a rate cut be treated as a bullish sign?

I don’t think so. It’s important to put a rate cut into context of where we are in the economic expansion cycle.

1. A rate cut in the middle of the economic expansion is bullish.
2. A rate cut in the later stages of the economic expansion isn’t as bullish, because it’s like pushing on a string.

For example, there’s only 3 similar historical cases if you only look at the ones in which unemployment was under 5%.

And lastly, rate cuts are not bullish for gold.

Crash

The S&P’s chart looks quite bearish, from a candlestick pattern

1. The S&P closed in the bottom 20% of its daily range yesterday
2. The S&P looked similar to a “bearish engulfing pattern” today, whereby its high exceeded yesterday’s high and its low was below yesterday’s low.

*This isn’t technically a “bearish engulfing pattern”. An official bearish engulfing pattern uses the daily OPEN and CLOSE instead of the daily HIGH and LOW.

From 1962 – present, there are only 3 other cases in which the S&P opened and closed in the bottom 20% of its daily range yesterday, today’s high was greater than yesterday’s high and today’s low was below yesterday’s low, and the S&P fell from the open to close today.

Of course we remember the most famous case:

Does this mean that today is 1987 “all over again”? No. I wouldn’t use n=3.

Job openings

The latest reading for Job Openings in construction surged from the previous reading. This indicator tends to trend higher in a bull market and trend lower in a bear market.

Job Openings is very choppy from month-to-month, so we can take a 12 month moving average to make this useful.

Here’s what happens when you buy the S&P when Job Openings’ 12 month average is going up, and sell when Job Openings’ 12 month average isn’t going up.

This is just one example of macro, which is still supportive of stocks right now.

S&P 500 tech spike

The tech sector spiked from last week to yesterday, make this the biggest 5 day spike since July 2009.

*The S&P 500 Information Technology sector is similar to the NASDAQ

Here’s what happens next to the tech sector when it spikes more than 8.9% over the past 5 days, while above its 200 dma.

Here’s what happens next to the S&P.

A slight bearish factor over the next 2-4 weeks.

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:

1. The U.S. stock market’s long term risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
2. Most of the medium term market studies (e.g. next 6-9 months) are bullish, although a few of trend following studies are starting to become bearish.
3. Market studies for the next 2-3 months lean bullish
4. Market studies over the next 1-2 weeks are mixed (some bullish and some bearish). Trade war news only adds to this uncertainty.
5. We focus on the medium-long term.

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