Volatility is low while the Fed is about to cut rates. What’s next for stocks

by Troy

The stock market’s volatility has been low for weeks. The Fed is about to make a late-cycle rate cut. Today’s headlines:

1. 7 weeks of low volatility
2. Fed is about to cut rates
3. Consumer Confidence is high
4. Stock market’s seasonality
5. Gold miners overbought?
6. USD’s momentum

Go here to understand our long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day.

7 weeks of low volatility

As the WSJ points out, the S&P has not had a daily move greater than 1% in either direction (+ or -) in the past 7 weeks:

Such a long period of low volatility is slightly more bearish than random for the S&P over the next 2 months (below-average 2 month gain of 0.51%)…

… and is mostly bullish for VIX over the next 2 months.

Rate cut

The Fed is about to cut rates while the stock market is near an all-time high. This is rare, because most rate cuts occur when the economy or stock market are already doing poorly.

In the past, rate cuts with stocks near all-time highs were mostly bearish for stocks 1 month later, but mostly bullish 9-12 months later.

Consumer Confidence

If the stock market does go up over the next year as easy money policy boosts stocks, I don’t think it’s reasonable to expect this bull market to last another 3, 4, or 5 years. Many indicators suggest that the economic expansion is late-cycle, including the Conference Board’s Consumer Confidence.

Consumer Confidence’s latest reading exceeded 135. There are only 3 other periods with such high Consumer Confidence:

1. January-August 1998
2. May 1999-November 2000
3. September-October 2018

While this may not be immediately long term bearish for stocks, this is a late-cycle sign for the bull market.

Seasonality

August is just around the corner. From a seasonality perspective, the stock market is about to enter into a weaker time of the year (August-September).

Gold miners

Gold, silver, and gold miners have surged in recent months. As a result, the Gold Miners Bullish Percent Index has surged to the highest level since 2016.

*Bullish Percent Index is a breadth indicator.

In the past, such a high reading for the Bullish Percent Index was mostly bearish for GDX (gold miners ETF) over the next 2 weeks.

U.S. Dollar

And lastly, the U.S. Dollar Index rallied 8 days in a row.

In the past, the USD usually followed through with more gains over the next 1-3 months.

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. Long term: risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
2. Medium term (next 6-9 months): most market studies lean bullish.
3. Short term (next 1-3 months) market studies lean bearish.
4. We focus on the medium-long term.

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