WEEKLY CCI

The commodity channel index (CCI) can be used to identify rare and extreme shifts in investor conviction. From stockcharts.com:

In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average, but is relatively low when prices are far below their average.

A rare shift was recently completed on the stock/bond chart below, which shows the performance of the Vanguard Index 500 relative to the Vanguard Long-Term Treasury Fund. Weekly CCI dropped below -250 in December 2018, which indicated a very high conviction to own defensive bonds relative to growth-oriented stocks. With some help from the Federal Reserve, CCI was able to recapture the centerline and closed above 100 on April 12, 2019.

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The shift above (from 1 to 2) took place over 3.7 months (relatively quickly). Since we are looking for shifts similar to the 2018-2019 shift, we confined our search to historical cases where the 1-to-2 shift took place in 7.0 months or less.

FIVE SIMILAR SHIFTS

Data for VFINX/VUSTX dates back to 1986. A similar shift (1986-2019) in weekly CCI for the stock/bond ratio has only taken place five previous times. The table below shows S&P 500 performance following the first weekly close with CCI above 100 after CCI dropped below -250. Average and median S&P 500 performance was positive over the next two years, telling us to remain open to better than expected outcomes.

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In the historical cases, after CCI crossed back above 100 (similar to April 12, 2019), the S&P 500 did experience some volatility. However, the maximum historical drawdown was a fairly muted 6.15%. The median drawdown was 1.15% over the next 180 days.

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SLOWING SHORT-TERM MOMENTUM VS. LONG-TERM MOMENTUM

This week’s stock market video examines a rapid shift in a popular breadth indicator, the NYSE Summation Index. The video also reviews asset class behavior and short-term S&P 500 momentum to gain insight into the odds of good things happening relative to the odds of bad things happening.