First Year Of A Bull Market, Or End Of A Bubble?

Historical Stock, Securities, Certificates, Fund, Bonds

This bull market is unique because unlike past bull markets, this one began with extreme speculation. Historically, extreme speculation occurred at the end of multi-year bull markets. This is why the markets are currently exhibiting extremely bullish signs (e.g. breadth today is similar to what you see at the start of multi-year bull markets) and extremely bearish signs (e.g. speculation today is similar to what you see at the end of multi-year bull markets). How do we reconcile these two opposites?

Let’s take a look at some bullish & bearish factors:

Subsiding volatility

VIX closed below 20 for the first time in almost a year. The past year was a nervous one for markets: stocks rallied, but investors and traders were consistently on edge.

Historical cases of elevated but subsiding volatility led to more gains for stocks over the next 6-12 months:

  1. July 1999: the dot-com bubble lasted for another 9 months.
  2. May 2003: stocks rallied significantly over the next 9 months:
  3. December 2009: stocks rallied over the next year, but there was a significant correction along the way

Fund flows

The recent VIX spike saw record inflows into the leveraged VIX ETF (UVXY).

Such strong inflows typically occurred after a VIX spike. Since VIX spikes when stocks fall, the S&P usually rallied higher over the next three months:

Bonds

Rising interest rates are pushing bond prices down. The Treasury Bond ETF TLT’s nine-week RSI is extremely low:

TLT could fall a little further over the next few months, but historically this was bullish over the next 9-12 months:

TLT’s historical data is limited. The Bloomberg Barclays U.S. Treasury Bond Index has more historical data. Once again, this was bullish for Treasury bonds:

Correlation

Plenty of traders have compared the S&P 500 over the past year to 1999, 2009, 1987, or (insert random year here). From a statistical point of view, the S&P 500 over the past year is most correlated to these other 1 year periods in history:

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