The no-pullback stock market rally continues

by Troy

The stock market’s rally continues, without a single meaningful pullback. As the S&P approaches its 2800 resistance, many technical traders are looking to start going short here.

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.

*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are blindly “guessing” the future.

VIX and its losing streak

VIX has fallen 9 weeks in a row. From 1990 – present, this has never happened before.

VIX is now under 14, for the first time since early-October 2018

Here’s what happens next to the S&P when VIX closes under 14, for the first time in 3 months.

*Data from 1990 – present

The stock market can fall in the short term (all great streaks come to an end), but the stock market’s 6-12 month forward returns are consistently bullish. Bear markets typically begin with a much more elevated VIX.

Here’s what happens next to VIX

Russell 2000

The Russell 2000 index (small caps) has finally broken out above its 200 dma.

Here’s what happens next to the Russell, when it closes above its 200 dma after being deeply oversold.

Momentum usually carries forward

9 weeks

It’s been an unrelenting 9 weeks for the stock market, with the Dow and NASDAQ both up 9 weeks in a row.

Historically, the Dow performed poorly over the next 2 weeks after going up 9 weeks in a row. Such strong rallies typically face short term resistance.

Meanwhile, the S&P and NASDAQ typically perform well throughout the rest of the year when the NASDAQ goes up 9 weeks in a row. Once again, momentum usually carries forward.

Terrific start to the year

The S&P is up more than 11% so far in January and February. There’s only 1 week left this month, so barring a major stock market decline, this will be one of the best starts to the year since 1923

Here’s what happens next to the S&P when it goes up more than 10% in January and February.

Margin debt

Margin debt in the stock market has fallen significantly over the past year

This was caused by the stock market’s poor performance in 2018, particularly in Q4 2018.

Here’s what happens next to the S&P margin debt falls more than -15% over the past 12 months

We can see an interesting phenomenon. The stock market’s 6-12 month forward returns are either incredibly bullish, or incredibly bearish. There is no inbetween.

No pullbacks

This has been one hell of a rally, with just 2 days in which the S&P lost more than -1%

Here’s what happens next to the S&P when it rises more than 15% over the past 40 days, while experiencing 2 or less -1% daily losses.

While the stock market has a short term bearish lean, the 1-12 month forward returns are more bullish than random.

China

After a horrible 2018, China’s stock market has finally broken out above its 200 day moving average.

Here’s what happens next to the Shanghai Index when it breaks out above its 200 dma, for the first time in 10 months

Click here for yesterday’s market study

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimstic 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 (i.e. next 6 months) is mostly neutral. There are a few more medium term bullish studies than medium term bearish studies
  3. The stock market’s short term has a bearish lean due to the large probability of a pullback/retest. Focus on the medium-long term (and especially the long term) because the short term is extremely hard to predict.