Market Outlook: Another Week, Another Failed Rally. What’s Next For Stocks

*Data from 1950 – present

As you can see, CNBC is mostly correct. This is mostly a bullish factor 1 year later, but it also does happen at the end of bull markets (see 1973 and 2000).

The S&P 500 : Russell 2000 ratio has surged during this correction because small caps have fallen much more than large caps.

Source: StockCharts

Here’s what happened next to the S&P when the S&P:Russell ratio is more than 7% above its 200 dma.

*Data from 1988 – present

As you can see, the stock market tends to face short term weakness over the next 1-2 weeks, but is mostly bullish 6-12 months later.

Meanwhile, the stock market’s DOWN volume has been quite heavy over the past week.

As of Thursday, the 5 day moving average of the NYSE Up/Dow Volume Ratio fell below 0.4.

Here’s what the S&P 500 did next (historically) when this happened.

*Data from 2003 – present

Once again, this is a bullish sign for stocks 6-12 months later.

One of the few things that worries me is the defensive sectors’ massive outperformance during this correction. This usually doesn’t happen during a bull market corrections.

For example, XLU (utilities sector) has gone up more than 5% over the past 3 months while XLK (tech stocks) has gone down more than -12%.

From 1998 – present, this happened when:

  1. The stock market was within 1 year of a bull market top, or…
  2. A bear market had already begun.

As you can see, the stock market’s returns started to deteriorate at the 6-9 month forward point.

As of Monday, XLU had risen more than 3.2% in the past 6 days, while the S&P falls more than -3.6% in the past 6 days.

From 1998 – present, this has only happened 4 other times.

Similarly, XLU has massively outperformed XLF (finance stocks).

The financial sector has been hammered this year, possibly due to the flatness of the yield curve. Here’s the KBW Bank Index ($BKX)

Source: Investing.com

Here’s what happened next to the S&P 500 when BKX fell more than -20% to a 1 year low, while the S&P was within 10% of a 1 year high.

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