Towards The End Of A Bull Market, Short Term Market Timing Becomes Difficult

The S&P remains stuck at its 2810 resistance level. Meanwhile, various economic indicators are flashing warning signs but not immediately bearish signs. Towards the end of a bull market, it’s very hard to know exactly how much gas there is left in the bull market’s tank. That’s why it’s better to focus on risk-reward instead of timing exact tops and bottoms.

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.

New Home Sales

As expected, the housing market remains mediocre. The latest reading for New Home Sales fell from its previous reading, but more importantly, New Home Sales’ 12 month moving average has fallen more than -2.4% in the past 5 months. Focus on the data’s trend instead of month-to-month readings.

Here’s what happens next to the S&P when New Home Sales’ 12 month moving average falls more than -2.4% over the past 5 months.

As you can see, this happens near some bull market tops.

  1. March 2006: 1.5 years before the bull market top
  2. June 1989: 1 year before a recession began
  3. April 1987: 3 months before a -30% stock market crash began
  4. April 1979: 1 year before a recession began
  5. September 1968: the start of a bear market.

Not immediately bearish for stocks, but something to watch out for in case the weakness in housing persists.

Labor market

The 4 week moving average of Initial Claims is trending higher. This is noticeably different from the rest of this economic expansion, in which Initial Claims was continuously falling.

To calculate the trend in Initial Claims, we can look at the 4 week average’s 6 month rate-of-change.

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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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