Investors Remain Fearful Despite The Market’s Recovery: What’s Next For Stocks

Bounce over the next 2 weeks, and then lower.

Dow’s breadth

The Dow McClellan Summation Index (breadth) rose above its 200-day moving average after spending a very brief period of time below it. This illustrates how short the recent correction has been.

Is this a sign that the rally is “all clear”?

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Here’s what happens next to the Dow when the Dow McClellan Summation Index was below its 200 dma for less than 3 weeks.

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The Dow’s 2-4 week forward returns are more bearish than random. Perhaps the stock market’s rally will pause before heading higher.

SKEW

The SKEW Index measures potential financial risk in the markets. Hence it tends to move inline with the S&P. Most of the time:

  1. S&P goes up = SKEW goes up
  2. S&P goes down = SKEW goes down

The stock market’s decline in May caused SKEW to decline significantly. But while the S&P has rallied back towards all-time highs recently, SKEW continues to hover near its lows.

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Is this normal?

Here’s what happens next to the S&P when it rises more than 3% over the past 3 months, while SKEW falls more than -13%.

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Mostly bullish 6-9 months later.

VIX

While the S&P has recovered from its late-May drop, VIX still remains elevated.

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Is this a bearish sign? Does an elevated VIX mean that the S&P will fall a little more in the short term?

Here’s what happens next to the S&P when VIX goes up more than 7% over the past 3 weeks while the S&P goes up more than 1%

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Slightly bearish over the next 2 weeks.

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk: reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
  2. Most of the medium term market studies (e.g. next 6-9 months) are mostly bullish.
  3. Market studies for the next 2-3 months lean bullish.
  4. Market studies over the next 2-4 weeks are mixed-bearish.
  5. We focus on the medium-long term.
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