The Market's Tell
INVESTOR CONVICTION
When markets peak, it speaks to a changing of the guard. During the bullish phase, the conviction to own growth-oriented stocks is greater than the conviction to own defensive-oriented bonds. During the bearish phase, the conviction to own defensive-oriented bonds is greater than the conviction to own growth-oriented stocks. The stock/bond ratio (see chart below) peaked several months before the major stock market peak that occurred in October 2007. The blue 100-day moving average helps us visualize the changing of the guard.
A NEW GUARD IN TOWN?
Thus, if the January 26, 2018 peak in the stock market was part of a major-topping process, we would expect to see the conviction to own defensive-oriented ETFs increase relative to the conviction to own growth-oriented ETFs, which is not the case as of September 10. We could have made the same argument using numerous risk-on/risk-off ratios. Broad asset class behavior continues to side with the bullish case.
A STRONG VISUAL STATEMENT
If we remove volatile price from the equation and focus solely on the stock/bond trend, we see a stark contrast between investor conviction in 2007-08 and 2017-18.
SIMPLE AND POWERFUL CHARTS
This week’s stock market video uses six simple charts to illustrate important concepts about investing, risk, and asset allocation. Comments from viewers include “must watch”, “only video you need to watch ”, and “excellent video”.
CHARTS HELP US ASSESS ODDS
Present-day charts tell us to remain open to better than expected stock market outcomes. If the charts deteriorate in a meaningful way, we must be flexible enough to reassess the odds of good things happening relative to the odds of bad things happening. We will continue to take it day by day.
Simple And Powerful Stock Market Charts
A PICTURE IS WORTH A THOUSAND WORDS
This Never Happened In The 2000/2008 Bear Markets
FIVE CONSECUTIVE GREEN MONTHS
When the stock market peaked in late January, many hypothesized it was the beginning of a long-term bear market. As shown in the S&P 500 monthly chart below, stocks posted red months in February and March, and went on to post gains for five consecutive months. The green months in April, May, June, July, and August mean the S&P 500 posted gains in 11 of the last 13 months.
DOT-COM BUST BEAR MARKET
Did stocks ever post five consecutive months of gains in the 2000-2002 bear market? As shown in the chart below, the answer is no. A three-month rally in late 2001 was followed by significantly lower lows.
FINANCIAL CRISIS BEAR MARKET
The best the bulls could muster was two consecutive green months during the financial crisis bear market.
IS TREND EXHAUSTION A CONCERN?
Gains in 11 of the last 13 months align better with a strong uptrend rather than a major topping process. Thus, this week's video takes a look at the status of the present-day bullish trend in the context of long-term trend exhaustion counts.
RELATIVE STRENGTH AND BEAR MARKETS
As noted in July, monthly RSI has also crossed bullish hurdles that acted as bearish barriers in the 2000-2002 and 2007-2009 bear markets.