Market Outlook: Is This A V-Shaped Recovery?

*This ratio typically declines during a correction, see 2016 and 2018.

When this happened in the past, the S&P was weak over the next 2 months. This has also been particularly bearish for the S&P over the next 2 weeks since 1987.

On the other hand, this isn’t particularly good for gold either. Gold’s 1 month forward returns are weak.

However, I want to remind investors and traders that there is no guarantee that the stock market will make another DOWN leg. The data is not irrefutably short term bearish right now. There are other short term bullish factors to consider.

Back-to-back volatility spikes

CNBC published an interesting article that looked at back-to-back volatility spikes.

VIX spikes tend to occur when the stock market makes a correction. The current correction comes just 2 months after another correction in May.

Back-to-back corrections (and back-to-back VIX spikes) are uncommon. They’re mostly bullish for the S&P over the next 2-3 months….

…. and bearish for VIX.

The signal date in the above charts (8/5/2019) was on Monday. If we add another 4 days (to move the signal date to 8/9/2019), it is still bullish for the S&P.

Volume

As is the case in most stock market declines, volume surged. SPY’s volume increased than more than 150% from 2 weeks ago. So much for a summer vacation.

When volume surged this much, this quickly in the past, the S&P mostly rallied over the next 2 weeks.

Yield

Bond prices continue to rally, even though sentiment and momentum have been “too high” for weeks. This happens from time to time – no indicator is perfect, and when a trend gets going it can seem unstoppable for a while. Hence the momentum effect.

The following is a weekly chart for the 10 year Treasury yield.

The 10 year yield’s weekly RSI has been below 30 for 8 of the past 11 weeks. This demonstrates the phrase “oversold can become even more oversold, and overbought can become even more overbought”.

Nevertheless, we seem to have hit an extreme scenario in which a bottom is either already here, or is very close.

In the past, rising bond yields have not been bearish for the S&P:

Trends: medium term

The S&P’s long term trend (200 day moving average) has been in a consolidation for months.

There are many different ways to define the phrase “200 day moving average has gone nowhere”. One such way is to look at the 200 day moving average’s standard deviation.

  1. When the standard deviation is low, it means that the 200 day moving average isn’t fluctuating significantly.
  2. When the standard deviation is normal or high, it means that the 200 dma is going up or down.
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Comments

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Moon Kil Woong 1 year ago Contributor's comment

There is a lot of negative news to digest and the market is taking it pretty well. That said, there is only so much the market can bear with unpredictability reigning supreme thanks to political factors that seem to be sliding out of control with no firm strategy. It is fortunate the Republicans and Democrats got a stimulus budget in before the recent set of issues.

Bill Johnson 1 year ago Member's comment

Very true.