What Widening Investment Grade Spreads Are Saying About The Stock Market

 

Is this a bear market symptom?

Here’s what happens next to the S&P 500 when there are 5 consecutive days in which the daily LOW is more than -1% below the daily OPEN, while the S&P was within 15% of a 1 year high.

*Data from 1962 – present

 

 

As you can see, this isn’t consistently bearish for the stock market on any time frame, although forward returns are slightly worse than random.

Volume

There has been a lot of downwards volume over the past week, which is normal during a selloff. However, the downwards volume has become somewhat extreme. Here’s the 5 day moving average of the NYSE Up/Down Volume Ratio.

 

Here’s what happens next to the S&P 500 when the 5 day moving average of the NYSE Up/Down Volume Ratio fell below 0.4

*Data from 2003 – present

 

The stock market’s forward returns were bullish 6 – 12 months later.

What isn’t bearish for the stock market

Some traders that I know are looking for the % of stocks above their 200 dma to fall even more before they buy. Their logic is “the % of stocks above their 200 dma today is a lot higher than it was in February 2016”.

 

This kind of thinking makes no sense. The stock market is down -11% today, while it was down -15% in February 2016. So of course the % of stocks above their 200 dma today is higher than it was in February 2016!

Based on this kind of logic, one would only ever buy stocks if the stock market fell at least -15%.

Gold:silver ratio

The gold:silver ratio remains stubbornly high, which is why many big funds, investors, and traders are bullish on precious metals.

 

However, eyeballing a chart often results in wrong conclusions because people see what they want to see when eyeballing a chart.

Here’s what happened next to gold when the gold:silver ratio exceeded 85.

*Data from 1973 – 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 clear, quantitative trading models, such as the  more

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