Stock Market’s Medium Term Is No Longer Bullish. It Is Now Mixed

Now that the S&P 500 has reached its 50% Fibonacci retracement, its medium term outlook is no longer decisively bullish. As we mentioned before, 13 of 15 historical 20% declines saw a pullback/retest after a 50% retracement.

Go here to understand our fundamentals-driven long term outlook.

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.

Long term macro

The stock market’s biggest long term problem is that as the economy reaches “as good as it gets” and stops improving, the long term risk is to the downside.

For example, Initial Claims are extremely low right now, and have been trending sideways for most of the past year.

Here’s what happened next to the S&P when the 3 month moving average for Initial Claims is higher than where it was 3 months ago, while the S&P is under its 200 dma and Initial Claims is under 300k (i.e. late cycle).

 

As you can see, the S&P’s long term forward returns are not good.

SKEW has returned to normal

During the December 2018 crash, many market watchers noted that SKEW had collapsed. Now that the stock market is rallying, SKEW is rallying as well.

*While most traders see SKEW as the probability of a black-swan event, this indicator seems to mostly move inline with the stock market itself. E.g. as the stock market rises, SKEW becomes high, and as the stock market falls, SKEW falls.

Here’s what happens next to the S&P when SKEW goes from more than -10% below its 200 dma to above its 200 dma within 2 weeks.

*Data from 1990 – present

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Our discretionary outlook is not a reflection of how we’re trading the markets right now. We trade based on our quantitative trading ...

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