by Troy
The S&P made an all-time high today on a daily CLOSE $ basis. On an intraday basis (daily HIGH $), the S&P is just 4 points from an all-time high.
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.
New highs
The S&P has made a new high.
Time: this is the first new high in more than half a year.
You can see that the S&P’s 1 year forward returns are mostly bullish.
Magnitude: the S&P was more than -15% below its 3 year high sometime in the past year.
Once again, mostly bullish over the next 1 year.
Like the S&P, the NASDAQ has also made a new closing high.
But unlike the S&P, the NASDAQ’s forward returns upon doing so aren’t as bullish as the S&P’s.
Momentum
The NASDAQ 100’s 14 day RSI is very high as it pushes to new all-time highs.
Is this bad news for stocks?
Here’s what happens next to the NASDAQ 100 when its 14 weekly RSI exceeds 80.
Here’s what happens next to the S&P.
Close to random on all time frames.
NASDAQ’s breadth
As the NASDAQ makes new highs, fewer than 50% of NASDAQ stocks are above their 200 day moving average. Surely this must be bearish? Surely this means that “only a few high flying FAANG stocks are rallying, and everyone else is falling”.
Here are all the dates when the NASDAQ is at a 2 year high while fewer than 50% of NASDAQ stocks are above their 200 dma
You can see that this happened during ther runup to the 2007 bull market top and 2015-2016 big correction. However, sometimes it took 1-2 years before the stock market reacted to this.
Small caps
While the Dow, NASDAQ, and S&P are all at or near all-time highs, the Russell 2000 (small caps) is still more than -8% below its all-time highs.
Yes, this happened in March 2000.
But it also happened during plenty of less ominous cases.
Zahorchak Method
The Zahorchak Method is a trend following indicator that combines price action trend following with breadth. Like any trend following indicator:
- You buy when the Zahorchak goes up
- You sell when Zahorchak goes down
Zahorchak has completely recovered from its Q4 2018 low.
Here’s what happens next to the S&P when the Zahorchak Method goes from -10 to +10 within the past 6 months.
As you can see, this is mostly bullish 6-12 months later.
-4 seems to be the line in the sand for the Zahorchak Method. Here’s what happens when you:
- Buy and hold the S&P when Zahorchak exceeds -4 (orange)
- Buy and hold whe S&P when Zahorchak is under -4 (grey)
Conference Board LEI
The Conference Board LEI’s 6 month rate-of-change is falling as it starts to flatten.
Here’s what happens next to the S&P when the Leading Economic Index’s 6 month rate-of-change falls below 0.4%
We can narrow down the historical cases to only look at ones in which Unemployment was under 5%.
Late-cycle.
Just like the dot com
A popular permabear that you may know is back at it again, saying “the NASDAQ 100’s weekly MACD is higher today than it was during the dot-com bubble. Crash crash crash”….
While the NASDAQ’s recent rally is indeed very strong, proclaiming “this is worse than the dot-com bubble” makes no sense.
The MACD is a nominal #. As the NASDAQ’s value goes higher, the MACD will forever make new all-time highs. (This is similar to how a -100 point drop in the Dow today is not the same as a -100 point drop in the Dow 30 years ago).
To compare apples to apples, we need to look at the MACD Histogram as a % of the NASDAQ’s value.
So yes, the MACD is high. But this is not “the most extreme in history”.
Here’s what happened next to the NASDAQ when its MACD is more than 1.3% of its value.
A slight short term bearish factor for the NASDAQ.
Here’s what happens next to the S&P
Bitcoin is digital gold again
The problem with Bitcoin is that everyone’s data is different. Regardless, it’s clear that Bitcoin is close to making a golden cross.
Here’s what happens next to Bitcoin when it makes a golden cross.
N=4, so this doesn’t mean much
Looking back on the crypto gold rush, I am reminded of a fact about the California gold rush from the 1800s
It’s not the gold diggers who make the real money. It’s the suppliers selling the shovels.
*I.e. the people who sell the dream make more money than people who buy the dream.
Read Where will stocks go next? Let’s look at various factors
Conclusion
Here is our discretionary market outlook:
- 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.
- The medium term direction (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
- 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.
- In summary, 12-24 months = bearish, 12 months = neutral, 6-9 months = slightly bullish.
Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.
