Short-Term Momentum

This week’s video outlined some signs of slowing short-term momentum in the S&P 500. Given the duration and magnitude of the current rally, concerns still remain. However, Tuesday’s session did provide some notable short-term shifts on the S&P 500’s daily chart.

The comments via the video clip/link above regarding the same indicators on the S&P 500’s weekly chart still apply. The market has provided numerous forms of “be open to higher highs” evidence over the past 90 days; some examples can be found here. We will continue to take it day by day, keeping an open mind about all outcomes, especially over the next three to six weeks.

Rare Shift In Stock/Bond Ratio

WEEKLY CCI

The commodity channel index (CCI) can be used to identify rare and extreme shifts in investor conviction. From stockcharts.com:

In general, CCI measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average, but is relatively low when prices are far below their average.

A rare shift was recently completed on the stock/bond chart below, which shows the performance of the Vanguard Index 500 relative to the Vanguard Long-Term Treasury Fund. Weekly CCI dropped below -250 in December 2018, which indicated a very high conviction to own defensive bonds relative to growth-oriented stocks. With some help from the Federal Reserve, CCI was able to recapture the centerline and closed above 100 on April 12, 2019.

The shift above (from 1 to 2) took place over 3.7 months (relatively quickly). Since we are looking for shifts similar to the 2018-2019 shift, we confined our search to historical cases where the 1-to-2 shift took place in 7.0 months or less.

FIVE SIMILAR SHIFTS

Data for VFINX/VUSTX dates back to 1986. A similar shift (1986-2019) in weekly CCI for the stock/bond ratio has only taken place five previous times. The table below shows S&P 500 performance following the first weekly close with CCI above 100 after CCI dropped below -250. Average and median S&P 500 performance was positive over the next two years, telling us to remain open to better than expected outcomes.

In the historical cases, after CCI crossed back above 100 (similar to April 12, 2019), the S&P 500 did experience some volatility. However, the maximum historical drawdown was a fairly muted 6.15%. The median drawdown was 1.15% over the next 180 days.

SLOWING SHORT-TERM MOMENTUM vs. LONG-TERM MOMENTUM

This week’s stock market video examines a rapid shift in a popular breadth indicator, the NYSE Summation Index. The video also reviews asset class behavior and short-term S&P 500 momentum to gain insight into the odds of good things happening relative to the odds of bad things happening.

Will Slowing Momentum Lead To A Painful Plunge In The Stock Market?

BREADTH, ASSET CLASS BEHAVIOR, AND MOMENTUM

The Long-Term Message From The VIX

STOCKS vs. EXPECTED VOLATILITY

The VIX measures the market’s expectation of future volatility. We can think of the S&P 500/VIX ratio as a way to track confidence in stocks and earnings relative to confidence the market will be volatile. The S&P 500/VIX ratio is currently in the process of trying to complete a relatively rare longer-term shift.

Number One: Bearish MACD cross above the centerline tells us the intermediate-term trend shifted to favoring volatility over stocks.

Number Two: The intermediate-trend trend failed to flip back in favor of stocks (MACD black stayed below MACD red).

Number Three: MACD black dropped below the centerline which indicated the longer-term trend was starting to favor volatility over stocks.

Number Four: In April 2019, MACD is trying to complete two steps: (1) MACD black above MACD red tells us the intermediate-term trend is trying to flip back in favor of stocks, and (2) MACD black above the centerline tells us the long-term trend is trying to turn back in favor of stocks.

Important: It took over 365 calendar days to complete all four steps, telling us this was a long-term shift in sentiment and economic confidence that produced heavy selling pressure before seeing a reversal in 2019.

WHAT DOES HISTORY TELL US?

The VIX is a relatively new instrument; thus, our study period only dates back to 1993. How many times has the S&P 500/VIX ratio been able to check all four boxes over a 365-day period or longer? The answer is four times. The 1996-1997 case is shown below.

WHAT HAPPENED NEXT?

The table below shows S&P 500 performance after all the boxes had been checked in each historical case. Returns had a positive bias over the first 90 days, but the 1997 case reminds us givebacks, corrections, and retracements are a normal part of all trends. Given our longer-term approach, the more relevant outcome in the historical cases was the market’s longer-term performance. All four historical cases posted positive returns 2.5 years down the road with the average and median gain exceeding 30%.

THE MOTHER OF ALL BREADTH-BASED SIGNALS?

This week’s stock market video looks at a rare move that took place between 12/24/2018 and 04/08/2019 and asks how many times has this taken place in the past and what happened next in the stock market?

WEIGHT OF THE EVIDENCE

There is nothing magical about the S&P 500/VIX ratio. However, it is another example of something that just happened in the present day that was followed by favorable long-term results in the stock market, telling us to keep an open mind about the possibility of better than expected outcomes in the coming months and years.

Given it is only April 15, the look of the 2019 S&P 500/VIX chart must carry into month-end; something that falls into the TBD category.