Evidence Of A Broad Swing In Global Stock Momentum

INSTITUTIONS DRIVE MARKETS

Institutions typically lead in the stock market and retail investors follow, which is why equity-based mutual funds and ETFs have seen record outflows in 2019, but the stock market has still gone up. Institutions have been supporting the markets since the December 2018 low.

THESE PERIODS ARE SIGNIFICANTLY DIFFERENT

Long-term trends can help us (a) monitor what institutions are doing and (b) assess the market’s risk-reward profile. The first chart below shows the S&P 500 before and after the major stock market peak in October 2007 and before and after the major stock market low in March 2009. The second chart shows the evolution of the S&P 500’s trend via the 11-month and 13-month moving averages.

The first monthly close with the S&P 500’s 11-month moving average (blue in chart above) below the 13-month moving average (red) came on April 30, 2008. Was the bearish signal helpful or too late? Helpful, given the S&P 500 closed at 1385 on April 30; it did not find a bottom until making an intraday low of 666 on March 6, 2009. Thus, after the 11/13 month bearish cross, the S&P 500 lost an additional 51.93%..

A POWERFUL VISUAL THAT CAN ASSIST IN 2019

We selected a broad set of global stock indexes to illustrate what institutional shifts look like and how it can correlate to future stock market performance. The table below shows global stock indexes that were in a bullish longer-term state using the 11-month and 13-month moving averages. Notice how the hard evidence looks significantly different before (May 31, 2007), during (May 31 2008 and August 31, 2008), and after (December 31, 2009) the financial crisis bear market.

HOW DOES THE SAME TABLE LOOK TODAY?

Does 2019 look more like the concerning data on May 31, 2008 or more like the constructive data in late 2009? The answer is more like the constructive and bullish-leaning data in late 2009 (and it is not even close). The table below speaks to the longer-term outlook for stocks and tells us very little about the next few days or next few weeks.

YOU SHOULD HAVE COMPARED TODAY TO OCTOBER 2007

In October 2007, the blue moving average is rolling over toward the red moving average, which is evidence of a waning trend. Today, we have seen just the opposite. The blue moving average recently turned back up and crossed the red moving average, which is evidence of a strengthening bullish trend. If large institutions thought the long-term outlook for the global economy was highly negative, the chart below would not look like it does today.

Another common rebuttal is “you should have compared today to October 2018”; we have done that on numerous occasions including in a December 6 video clip.

THESE SIGNALS SERVE TO CONFIRM EARLIER SIGNALS

Data telling us to be open to a major stock market low started to show up on January 4, 2019 when Jerome Powell said, “We are always prepared to shift the stance of policy and to shift it significantly”. Powell’s 180-degree turn from his December 2018 comments were followed by a bullish breadth thrust, another signal that provides insight into what large institutions are doing and seeing in terms of the longer-term global economic outlook. This week’s stock market video provides additional data backing up the “be open to more upside in stocks” thesis.

Global Dow Nails Down Bullish Signal

SIGN OF GROWING CONFIDENCE

At the end of November, monthly CCI completed a momentum round trip by closing above 100 after closing below -100 in late 2018. CCI helps us track market momentum. The turn that just took place over the last year is typically associated with a significant shift from pessimism to optimism as it relates to investor perceptions of future economic and market outcomes.

HISTORY SAYS THIS SIGNAL INCREASES LONG-TERM BULLISH ODDS

If we look at the same Global Dow chart on a much longer timeframe, we get a better understanding of the possible significance of the recent signal. The blue arrows below indicate similar turns in monthly CCI have occurred near major lows in the Global Dow. The bottom portion of the chart shows long-term S&P 500 performance was favorable following past “highly pessimistic to optimistic” moves in monthly CCI.

EVIDENCE OF INSTITUTIONAL SUPPORT FOR STOCKS

Large institutions tend to move markets. If large institutions thought the long-term outlook for stocks and the global economy was highly negative, it is unlikely the chart of the Global Dow would see a bullish turn in monthly momentum similar to what just took place over the past year. Keeping in mind this signal helps us with long-term odds, the table below shows very favorable historical outcomes for the S&P 500 looking out one to four years.

HISTORY SAYS THE S&P 500 COULD BE HEADED TO 3600

This week’s stock market video explores realistic expectations for both upside potential and volatility looking out 1-2 years.

SIGNS OF GLOBAL ECONOMIC STABILITY

The trade war has raised concerns about slowing manufacturing activity around the globe. Recent economic data from China seems to align with the story being told by the monthly chart of the Global Dow. From The Wall Street Journal:

“There have been positive signs from other regions. In China, the private Caixin manufacturing purchasing managers index notched its fourth straight month of growth in November, bolstering the case that factory activity in the world’s second-largest economy has stabilized after a decline.”

History Says S&P 500 3600 Is Very Realistic

LEARNING FROM VOLATILITY PROFILES

Investors Run From Stocks At Record Pace

BIGGEST WITHDRAWALS ON RECORD

There is a lot of relevant information in the text below from a Wall Street Journal article dated December 8, 2019:

“Investors have pulled $135.5 billion from U.S. stock-focused mutual funds and exchange-traded funds so far this year, the biggest withdrawals on record, according to data provider Refinitiv Lipper, which tracked the data going back to 1992.”

DOES 2019 LOOK ANYTHING LIKE THE MAJOR PEAK IN 2000?

Given we know extreme sentiment can be a powerful contrary indicator, we would expect exuberant investors to rush into stock-based investments near a major stock market peak, which is exactly what happened in the year 2000. From a Federal Reserve Bulletin dated December 2000:

“Mutual fund investors returned vigorously to equity funds, increasing the pace of net new cash flows into those funds to a record level over the first eight months of 2000.”

Keep in mind, the S&P 500 peaked in March 2000 and investors were still adding to stock-based funds at a record pace through the end of August 2000, which looks nothing like what we have seen in 2019.

HOW DOES 2019 COMPARE TO OTHER PERIODS?

As shown on December 2, when investors made a mad dash for the equity fund exits, it occurred near major stock market lows in 2002, 2009, 2011, and 2016.

We just experienced heavy equity fund outflows in 2019, similar to the periods shown in the graph above. How did the S&P 500 perform walking forward from December 2002, March 2009, December 2011, and July 2016? The answer is in a manner that looks nothing like a major stock market top.

TEN NEW STOCK MARKET SIGNALS

This week’s stock market video covers ten “this just happened in 2019” signals. The video also takes a look at the blow-off top cases cited in a recent CNBC article.

DAY BY DAY

The market still has trade-related hurdles to contend with between now and December 15, reminding us to walk forward with a flexible, unbiased, and open mind. The fund flows data above simply helps us with historical perspective on what has taken place in 2019. From The Wall Street Journal:

“There’s not a lot of faith in this market,” said Scott Wren, a senior global equity strategist at Wells Fargo Investment Institute. “There’s no chasing going on. Usually before you hit the top in a cycle, there’s a lot of chasing and fund flows are higher.”