This remarkably resilient market is closely following the post-election path I calculated in April. The rally goes on despite going more than a year without a 5-percent dip, strange headlines, central bank policy changes and the largest (-20%) underweight allocation by top managers since 2008. Is it really that bad? Can this rally continue?
Chart 1: The current market rally is closely following the average of the historical performance during administrations identified in the chart. The market has shrugged off headline risk and central bank actions during its ascent. An separate calculation shows that there is a 78% chance of positive second-half returns.
The key to understanding the market is that it remains glued to the post-election path I calculated in April. There have been plenty of strange headlines and central bank actions to push the market off its projected path, but the market has been remarkably resistant to all distractions. Chart 1 will be template for the rest of the year, which I have already forecast to have a 78% chance of positive returns. As a reminder, the orange "average" line is the market's performance during the terms of presidents Kennedy, Johnson, Reagan (II), Bush , Clinton, Clinton (II) and Obama (II) where the term in parenthesis calls out the second term as needed.
Index Advances Mask Choppy Trading In Broader Market
The rise in the indexes has masked choppy trading in the broader market, such as the Russell 1000 universe. I applied the short-term trend-following model to the Russell 1000 universe and found that trading there has actually been very choppy. In Chart 2 I plot the percent of stocks rising (blue line) and the percentage of stocks falling (orange line) since the end of September, 2016. When the blue line is above the orange line, more stocks are rising over the short-term (i.e., their 5-day simple moving average is above the 25-day half-width Bollinger bands). Observe how the orange line (down-trending stocks) was above the blue-line going into the election. The sharp post-election rally saw nearly 75% of the stocks in the Russell 1000 universe rising over the short-term. Since March, 2017 however, the two lines have crossed over nearly a dozen times, indicative of choppy trading. Note how quickly the blue line accelerated in the most recent rally.
Chart 2: The broader market, represented by the Russell 1000 universe has traded with many short-term changes in direction since March once the post-election rally faded.
Global Financial Markets Show Less Choppy Trading
I applied the short-term trend-following model to all the ETFs in the SPDR universe. The picture is similar to Chart 3, but with fewer changes in direction. Observe again the sell-off last month, and the rapid reversal this month. Thus, the broad ETF providers, with their diverse portfolios, international and emerging markets, as well as bond and bond-clone ETFs show greater short-term trend-persistence than the Russell 1000 universe. This means there have been very broad-based trends across the global financial markets.
Chart 3: The short-term model applied to the entire SPDR universe shows fewer direction changes than the Russell 1000 universe, suggesting there have been more persistent trends across the global financial markets.
Early Warning of Trend Changes
In order to answer the question if any trend changes are in the wind, I moved up one time step to the medium-term trend-following models and applied them to the SPDRS universe. I first looked at the 2015-16 time period, starting at the end of May, 2015. The down-trending stocks fraction, represented by the orange line, had crossed above the blue line in early June, and again in early December, well before the subsequent sell-offs. The upside cross-over in early March 2017 was also very timely. Thus, there is good insight about potential market weakness from applying the medium-term model to the SPDRs universe. The most recent picture of the market (see Chart 5) shows that the orange line is well below the blue line (rising ETFs outnumber falling ETFs) and a cross-over does not seem imminent. Remember that the ETF portfolios may have many stocks in common, so this provides a portfolio-level look at market internals, rather than a stock-level look shown in Chart 2 above. Chart 5 suggests that the market can continue to rally for the time being.
Chart 4: A look back at the 2015-16 market through the prism of the medium-term trend-following system applied to the SPDRS universe. The orange line (medium-term down-trending stock fraction) had crossed above the blue line in early June, well before the sell-off in August. Similarly, the orange line had crossed above the blue line in early December, well before the January 2016 sell-off.
Chart 5: Comparing Charts 4 and 5 we can say that there is no cross-over imminent of the orange line over the blue line, which means that the trend is still firmly up and the market rally can continue.
SPX Universe Also Shows No Imminent MT Crossover
I applied the medium-term model to the S&P 500 Universe with similar results as Chart 5 (see Chart 6). There are no signs of a potential crossover of down-trending stocks over up-trending stocks over the medium-term in the SPX universe, which is bullish over the medium-term.Chart 6: More stocks in the SPX universe were trending down than up before the election in the medium-term. The post-election rally led to a surge in up-trending stocks that faded briefly in March. The two lines are not likely to cross over imminently.
Trend Check Carpet is All Green
The trend check carpet is "All Green", across all time frames and indices from 30 to over 2000 stocks (see Chart 7). The trend following models increase in time from 25 to 200 days, doubling at each step from top to bottom. Market breadth increases from left to right, from 30 in the Dow Jones Industrials to over 2000 stocks in the NYSE composite. The trend check carpet shows a broad-based uptrend in the market at the moment, confirming the data in the previous charts.
Chart 7: Trend check summary is all green, across four time frames and a broad swath of the market. This is a strong picture of a broad-based up-trend in the markets. The time intervals used in the analysis start at 25-days at the top, and double at each step. The market breadth increases from left to right.
I also checked the path of least resistance calculations for the Russell 1000 universe. Consistent with the "All Green" dials, on balance, a majority of the stocks in the index are trending higher across all of the four time frames (see Chart 8). The longer-term view using weekly data is also pointing firmly higher, with the Chande Trend Meter comfortably above 90 (see Chart 9).
Chart 8: On balance, more stocks are trending up than down or flat across all four time frames. The time frames are the same as in Chart 7 above. This support the view that a broad uptrend is measurable in the market.
Chart 9: The Chande Trend Meter is above 90 on the weekly chart, and support should arrive around 2345-2350 at the top of the upper 50-week half-sigma bands. The long-term trend is clearly up with the CTM consistently in the green region.
The resilient market rally is closely tracking the post-election path calculated in my previous post. The medium-term trend picture does not show an immediate likelihood of a surge in down-trending stocks. Thus, I expect the rally to continue. The trend check carpet is "All Green" and the trading environment across the Russell 1000 universe is pointing higher. Thus the concurrent and early-warning measures are not showing any cause for immediate concern.
What could cause a reversal? Well, some kind of external event could cause a sell-off, and that event risk or headline cannot be captured on these charts, due to the smoothing built into the models.
Another possibility is a series of small new highs with an immediate reversal into support, such as in the summer of 2015.
This is a market that likes to close gaps, and it could come down to close the gap on the daily charts around 2430 on the SPX without changing the overall trend.
I will to track the fate of the down-trending stocks to see if the oft-seen weakness in early fall will play its usual role this year.
Let me know if you think the rally can continue. In the mean time, please subscribe my blog by using the quick and easy sign-up link below.