It Looks Like The Stock Market Is In A Bubble

As the stock market approaches all-time highs, a few economic indicators are deteriorating. Meanwhile, the stock market’s uptrend remains strong.

Let’s determine the stock market’s most probable medium-term direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day.

*Probability ≠ certainty. Past performance ≠ future performance. But if you don’t use the past as a guide, you are blindly “guessing” the future.

Strong uptrend

The S&P 500 is in a strong uptrend. Its 20-day moving average has gone up 64 days in a row.

Here’s what happens next to the S&P when its 20 dma rises 64 consecutive days.

*Data from 1950 – present


The stock market’s 3-6 month forward returns are mostly bullish.


Consumer discretionary and tech stocks are on fire. XLY’s (consumer discretionary ETF) 14 weekly RSI is now above 67.

From 1998 – present, XLY’s weekly RSI has exceeded 67 just 17.38% of the time. Here’s what would happen if you only buy XLY when its 14 weekly RSI exceeds 67.


So if you are thinking of buying XLY right now, now is probably not the time to chase the rally. (Short Term)

With that being said, here’s what happens next to XLY when its 14 weekly RSI exceeds 67.

*Data from 1998 – present. This week isn’t over, so keep this in mind.


Here’s what happens next to the S&P


You can see that the 9-12 month forward returns are more bullish than random. Why?

Because consumer discretionary didn’t have such strong momentum in the 2000-2002 and 2007-2009 bear markets.


Economic Surprise Index

The Citigroup Economic Surprise Index continues to fall while the stock market continues to rally.

This divergence confounds many people.

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Our discretionary outlook does not reflect how we trade the markets right now. We trade based on our quantitative trading models. When our ...

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Flat Broke 1 year ago Member's comment

It’s a good article but bad strategy. You don’t have to think in the modern mkt-just buy!