Tech Stocks Made New All-Time High, S&P 500 Almost There

Before you panic from recency bias, please consider what has caused XLV’s underperformance. From CNN:

The sector-wide slump came after UnitedHealth (NYSE:UNH) CEO David Wichmann said “Medicare for All” policies, as proposed by some politicians and presumed candidates for the 2020 presidential election, would hurt the industry.

So this is more of an industry-specific issue than a systematic problem.

Here’s what happens next to the S&P and XLV when XLV underperforms the S&P by more than -4.6% over the past 2 days.

Why did all the historical cases occur during bear markets (2000-2002, 2007-2009)?

Because bear markets are extremely volatile. It is very easy for the market to go up and down 5% in a day, which means that many sectors will diverge significantly from each other on a multi-day basis.

Let’s look at the JPMorgan (NYSE:JPM) Global Currency Volatility Index more closely.

As you can see, currency volatility is very low right now. Here’s what happens next to the USD Index when the JPMorgan Global Currency Volatility Index is at a multi-year low.

Herein lies the problem: you only know that currency volatility is at a multi-year low with 20/20 hindsight. In real time, you have no idea if volatility will go even lower.

Here’s a more objective, real-time study. Here’s what happens next to the USD Index when the JPMorgan Global Currency Volatility Index is more than -25% below its 200 dma.

Quite bullish 9-12 months later.

Here’s what happens next to the S&P

Contrary to popular belief, a rising USD isn’t a consistent drag on the S&P.

The S&P 500 Low Volatility Index is on fire, making new highs before the S&P and NASDAQ.

As a result, the S&P 500 Low Volatility Index is quite overbought. Its 14 weekly RSI now exceeds 68.

Here’s what happens next to the S&P Low Volatility Index when its weekly RSI is this high.

The S&P Low Volatility Index (which moves closely with the S&P) has a slight short term bearish lean.

And lastly, here’s the most curve fitted, data mined trading model of all time.

This is what happens when you only buy the S&P during the first 5 and last 2 trading days of each month.

As you can see, this model beats buy and hold. Would I use this?
No.

1. Data mined
2. There’s no fundamental reason as to why this should outperform
3. This curve fitted strategy has gone nowhere since 2008

Here is our discretionary market outlook:

1. The U.S. stock market’s long term risk:reward is no longer bullish . In a most optimistic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
2. The medium term direction (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
3. We don’t predict the short term because the short term is always extremely random. At the moment, the short term does seem to have a slight bearish lean.
4. In summary, 12-24 months = bearish, 12 months = neutral, 6-9 months = slightly bullish.

Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.

Written By: Troy Bombardia