Stock market is making a triple top?

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The S&P went up today while oil tanked. Depending on which index you look at, the U.S. stock market “could” be making a triple top. (Also, U.S.-Mexico negotiators failed to reach a deal). Today’s headlines:

  1. Volume is interesting
  2. Defensives are outperforming
  3. Treasury yields and stocks are both up
  4. 30 year – 2 year yield curve steepening
  5. What oil & gold are saying about stocks
  6. Will the S&P “catch down” to oil’s crash?
  7. Some very bearish patterns.

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.

Interesting volume

While the S&P was falling over the past 4 weeks (excluding this week), SPY’s volume was also falling (SPY = S&P 500 ETF).

This is unusual, because stock market declines usually coincide with a spike in volatility.

Here’s what happens next to the S&P when SPY falls more than -5% over the past 4 weeks, while volume falls more than -2%

It’s interesting to see how this occurred quite regularly during the 2000-2002 and 2007-2009 bear markets.

Defensives surge

While the stock market rallied over the past 2 days, defensive sectors such as utilities have done well.

At the very least, outperforming defensive sectors is not a bullish sign for stocks.

Here’s what happens next to the S&P when XLU rallies more than +3.5% over the past 4 days, while the S&P rallies less than +1.5%

Forward returns are less bullish than random.

Treasury yields and stocks

Treasury yields and stocks continue to be strongly correlated. Both yields and stocks have gone up over the past 2 days.

Here’s what happens next to the S&P when the 10 year yield and S&P’s 2 day rate-of-change both exceed 2%, while their correlation is greater than 0.85

More bearish 1 week later.

30 year – 2 year spread spike

Yesterday we looked at the steepening 30 year – 2 year Treasury yield. That portion of the yield curve steepened even more today.

As we’ve said in the past, a steepening yield curve is worse than a yield curve inversion

Here’s what happens next to the S&P when the 30 year – 2 year Treasury yield steepens more than 0.45% over the past 191 days while the S&P falls more than -2%.

Forward returns up to 6 months later are more bearish than random.

As we’ve said in the past, the main points of macro weakness center around trade, manufacturing, and the yield curve.

Oil

There have been plenty of media headlines about oil, which is now in “bear market territory” (down -20%)

Oil has fallen more than -18% over the past 10 days. Historically, This could lead to more selling over the past next month, but was mostly bullish for oil 6-9 months later.

Market Watch highlighted a popular permabear’s chart today which basically stated:

Last week gold and silver stocks rallied more than 5.2% while oil declined 8.7%

The only 3 other times this happened were in 2001 and 2008.

Stocks will crash, recession is here!!!

*These permabears will remain unnamed, because many of them use low sample size BS to increase their popularity by stoking your fears. Bad news sells, and giving them undeserved attention does nothing except harm investors. There are valid reasons to be bearish, but low sample BS isn’t one of them.

Low sample size stats are BS because you can find any “evidence” to support any narrative as long as you fit the parameters enough.

So let’s relax this permabear’s parameters to increase the sample size and see if his argument remains valid. Here’s what happens next to the S&P when oil falls more than -10% over the past 6 days while gold rallies more than +3%

Oil’s divergence with stocks

Oil and the stock market have had a strong correlation recently. But over the past 2 days, the stock market has gone up while oil has gone down.

I’m not a fan of most “divergences”, because most of them don’t make much sense (correlations always inevitably break down).

But there is some validity to this one.

Here’s what happens next to the S&P when oil falls more than -2% over the past two days while the S&P rallied more than +2%, while oil and the S&P’s 3 month correlation is greater than 0.8%. In other words, oil diverging from the stock market while they have a strong medium term correlation.

You can see that the 2 month forward returns are more bearish than random.

What if we relax the parameters to increase the sample size? Here’s what happens next to the S&P when oil falls more than -1.5% over the past two days while the S&P rallied more than +1.5%

Still more bearish than random 2 months later.

About that triple top…

It “looks like” the Dow is making a triple top…

Here’s the problem with double tops, triple tops, flat tops, head and shoulders, etc.

Almost EVERY SINGLE market top is a double top, triple top, or head and shoulders.

However, not every double top, triple top, or head and shoulder is a market top.

With 20/20 hindsight, these patterns always “look like” they perfectly predicted market tops. But in real time (when you considered the number of failed bearish patterns), these are no better than a 50/50 coin toss.

With that being said…

  1. The S&P is making a Batman-pattern right now.
  2. The S&P made a Batman-pattern in 2007.
  3. I guess today is 2007 all over again. 😉

For more bearish patterns, see below:

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 over the next 1-2 weeks are mixed (some bullish and some bearish). Trade war news only adds to this uncertainty.
  4. HOWEVER, our market studies for the next 1-3 months are starting to turn more bullish.
  5. We focus on the medium-long term.

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

 

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