2019 Market Action Points To Positive Long-Term Outcomes

FOCUS TENDS TO BE SHORT-TERM

Investors and traders have a tendency to fall into the recency-bias trap over and over. For example, after the S&P 500 closed at a new weekly high on Friday, July 12, it was easy to believe “the bulls are firmly in control”.

ccm-market-model-ciovacco-looks-great-a.png

Fast forward to Friday, July 19, after the S&P 500 dropped 1.23% for the week, and it was easy to shift into “we are in big trouble” recency-bias mode.

ccm-market-model-ciovacco-big-trouble.png

RARE MARKET ACTION IN EARLY 2019 REMAINS RELEVANT

Dating back to 1950, the S&P 500 has only dropped over 40% three times: 1973-74, 2000-02, and 2007-09. In each case after the big drop, something caused investors to change their attitude and behavior related to the attractiveness of common stocks. Major lows are rare and the shifts that occur in the minds of human beings near major lows are rare. History tells us valuable information can be found in rare market events.

A rare event took place between the close on December 24, 2018 and the close on February 22, 2019. As shown in the $NYA50R chart below, the percentage of NYSE stocks above their 50-day moving average dropped below 12% and then rebounded to above 88%; a move that showed a significant shift in the perception of the stock market’s longer-term potential.

short-takes-ccm-market-model-ciovacco-2018-nya50r.png

SIMILAR MOVES IN 2003, 2009, 2012, AND 2016

Going back to 2002, a similar shift in market participant perceptions occurred in 2003, 2009, 2012, and 2016. In each case, the percentage of NYSE stocks above their 50-day moving average dropped below 12% and then rallied back above 88%.

ccm-market-model-ciovacco-short-takes-nya50r-ly.png

WHAT HAPPENED NEXT IN THE STOCK MARKET?

The table below shows S&P 500 performance in each of the four cases that featured the rare push from below 12% to above 88% in the percentage of NYSE stocks above their 50-day moving average.

short-takes-ccm-market-model-ciovacco-table-nya50r.png

DOES RECENT DATA ALIGN WITH FEBRUARY’S SIGNAL?

The push back above 88% in NYSE stocks above their 50-day moving average went into the history books on February 22, 2019. Therefore, if the 2019 market was following the historical script, we would expect to see additional improvement in the market’s technical profile over the past five months. For example, the chart below shows the S&P 500’s 30, 40, and 50-week moving averages on February 15, 2019. The chart shows a waning and indecisive look with the 30-week moving average (blue) having dropped below the 40-week (red).

1 2
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.