Is the stock market today like 1999?


As the S&P’s rally stalls at the 200 day moving average, some traders are wondering if the stock market could still have 1 more leg up in 2019 before the bull market ends. This is a very real possibility, and would confound the bears who thought that the stock market’s crash in Q4 2018 was the start of “the big drop” that they have been consistently anticipating over the past 9 years.

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

VIX has fallen 6 days in a row, and is now below its 200 day moving average.

Here’s what happens next to the S&P 500 when VIX falls 6 days in a row, while under its 200 dma

Historically, this has been consistently bullish for the stock market 9-12 months later
Why?
Because in a bear market, VIX remains elevated above its 200 dma.

Here’s what happens next to VIX

As you can see, this is not consistently bullish nor bearish for VIX

NYSI

The NYSE McClellan Summation Index (a breadth indicator) is high right now, after being very low in late-2018.

Here’s what happens next to the S&P when the NYSE McClellan Summation Index exceeds 850

As you can see, this is quite bullish for stocks 6-12 months later. Bear market rallies (e.g. 2000-2002 and 2007-2009) typically see stronger breadth readings.

50 day moving average

Another measure of breadth is the % of stocks above their 50 day moving average.
The % of S&P 500 stocks above their 50 dma has surged from less than 10% to more than 88% within 3 months

This kind of breadth surged has happened 3 other times over the past 17 years, and all of them occurred within a bull market.

Financial conditions

Despite the constant doom and gloom from financial media, financial conditions for the average American have improved dramatically over the past 10 years.
Here’s a chart from the University of Michigan, measuring the current financial situation compared with a year ago from respondents.

While this means that the economy is “strong”, it is a little “too strong”.
Here are months when the “Current Financial Conditions Compared With a Year Ago” exceeded 130, overlapped onto a chart of the S&P 500

As you can see, this is certainly a late-cycle sign for the stock market and economy.
It isn’t an immediately long term bearish sign, because sometimes this situation can persistent for years.

Rate cut

Former Fed Chairwoman said that the Fed’s next move could be to cut interest rates.

When the Fed starts to cut interest rates, watch out.

  1. Rate hikes should not be feared. The Fed hikes rates when the economy is growing, which is what drives bull markets.
  2. Rate cuts should be feared. Towards the end of an economic expansion, the Fed cuts rates when the economy is deteriorating, which is the driver for bear markets.

Investors should watch out for the first rate cut after the last rate hike in each economic expansion.

  1. September 18, 2007
  2. January 3, 2001
  3. June 6, 1989

Here’s what the S&P 500 did next in each of those cases

This will be a long term bearish sign if the Fed starts to cut rates in the second half of 2019.

Treasury yield and stocks

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*This is for members-only
While the stock market has rallied significantly over the past 1.5 months, Treasury bond yields have fallen.
This is typical price action following a lot of bear markets, recessions, and 20%+ declines.

Here’s what happens next to the S&P when its goes up more than 15% over the past 30 days, while the 10 year Treasury yield falls

As you can see, this is consistently bullish for stocks 6-12 months later.
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Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (i.e. next 3-6 months) is neutral. Some market studies are medium term bullish while others are medium term bearish
  3. The stock market’s short term has a bearish lean due to the large probability of a pullback/retestFocus on the medium-long term (and especially the long term) because the short term is extremely hard to predict.

Goldman Sachs’ Bull/Bear Indicator demonstrates that while the bull market’s top isn’t necessarily in, risk:reward does favor long term bears.

Our discretionary outlook is not a reflection of how we’re trading the markets right now. We trade based on our quantitative trading models.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.
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