Stocks made a new high very quickly. What’s next

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The S&P 500 made a new all-time high today after falling more than -6% just a few weeks ago. This has been a quick recovery. Today’s headlines:

  1. Stock market’s quick recovery
  2. Despite the stock market’s recovery, sentiment is still quite pessimistic
  3. 10 year – 2 year yield curve is steepening
  4. Baltic Dry Index improvement
  5. Gold’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.

Stock market’s quick recovery

The S&P 500 made a new all-time high today. Considering that the S&P was down more than -6% just 3 weeks ago, this has been a quick recovery.

Similar quick corrections could see short term weakness over the next 2 weeks, but were mostly bullish 9 months later.

Sentiment is still quite pessimistic

The latest AAII reading saw a slight decrease in bears and a slight increase in bulls.

Nevertheless, sentiment is still quite bearish considering where stocks are (at all-time highs). There have been more bears than bulls for 6 weeks in a row.

Similar historical cases (more bears than bulls for 6 weeks in a row, while stocks are up) have been mostly bullish for stocks on all time frames.

10 year – 2 year yield curve is steepening

While the 10 year – 3 month yield curve is inverted, the 10 year – 2 year yield curve is steepening. The 10 year – 2 year yield curve has made a golden cross (50 dma above 200 dma).

This is important because the yield curve tends to steepen during a bear market and recession. (Fed cutting short term rates = steepening yield curve).

Is the currently steepening 10 year – 2 year yield curve bad news for the stock market?

Here’s what happens next to the S&P when the 10 year -2 year makes a golden cross, while below 0.3

Here’s how long until the next recession-driven bear market.

The yield curve is an indicator that demonstrates long term risk:reward. Based on the yield curve, this bull market won’t last beyond 2020.

Baltic Dry Index

Amid all the talk of a global growth slowdown, not many people talk about economic data that is decent or improving. One of these improving indicators is the Baltic Dry Index, which has finally crossed above its 200 dma for the first time since December.

*The Baltic Dry Index is a gauge for global shipping.

Here’s what happens next to the S&P when the Baltic Dry Index crosses above its 200 dma for the first time in more than 3 months.

Mostly bullish 6-12 months later.

Gold breakout

And lastly, gold has caught the attention of traders recently as it is breaking out.

Such long consolidations are rare. There have only been 4 other cases in which gold made a 3 year high for the first time in more than 3 years.

You can see that gold tends to face some weakness over the next few months. Even the famed 2000s gold bull market did not start off with a bang.

Here’s 1996

Here’s 1986

Here’s 1978

Long story short: these breakouts aren’t that easy.

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. The medium term market studies (e.g. next 6-9 months) are mostly bullish.
  3. Market studies for the next 2-3 months lean bullish.
  4. Market studies over the next 2-4 weeks are mixed.
  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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