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Posts Tagged ‘S&P 500’

LT wave for January 2020

Posted by Dan on January 2, 2020

After a few weak months our LT wave seems to have kicked back into the proper gear. This is the projected price pattern for S&P 500 in January:


After expected weakness in early December the market flatlined a bit before bursting higher in the subsequent strong period. For January the wave suggests a weak period until around the 9th, followed by a stronger week. Weakness kicks in again after the 19th, only interrupted by a few strong days around the 25th.

Good luck and happy 2020s.

Posted in Market Commentary | Tagged: , | 5 Comments »

Is gold really outperforming the S&P 500?

Posted by Dan on February 15, 2019

I saw this tweet, which tries to show that gold has been a better investment than stocks:

I will shamelessly repost the chart it uses to make the case:


That looks very convincing, but there are a few problems with this:
1 – The starting point of year 2000 is quite conveniently chosen. Stocks were at a major peak in early 2000, while gold was at a generational low.
2 – To make a fair comparison we have to include dividends. Here is a good calculator that gives you the total return for S&P 500 with dividends reinvested: From Jan 2000 until Dec 2018 the total return for S&P 500 with dividends reinvested is 157%, more than double the 70% used in the above chart.
3 – If an investor kept all his savings in physical gold, then he would probably have used storage or insurance or both. That would have reduced the given 345% return quite a bit.

Gold would still be the winner over this given period, but not by as much as this chart suggests.

To have a more fair comparison that has both gold and stocks go through a few bull and bear markets it would be better to take 1971 as the starting point. That’s when gold was decoupled from the dollar and started trading freely.
If we use $37.50 as the 1971 starting price and $1283 as the closing price for 2018, then we get 3,321% gain for gold since 1971.
The total return for S&P 500 without considering dividends was 2646% from Jan 1971 until Dec 2018. So, it looks like gold wins.
But with dividends reinvested an S&P 500 portfolio returned 10,813%. That’s how much difference a little bit of compounding can make over a longer time period.
Conclusion: the stock investor is almost 3 times richer than the gold investor over this nearly 50 year period.

Does this mean stocks will again outperform gold in the next 50 years? I don’t know. Some people will probably see this as a reason to believe that the price of gold must multiply by three to catch up with stocks. Who knows?

Posted in Market Commentary | Tagged: , , | 2 Comments »

Anticipating future price action

Posted by Dan on January 16, 2019

In a recent blog post we explored what typically happens after a huge 4-5% up day in the S&P 500, as was seen on December 26: How to trade after huge up days.

As always, bearish commentators were out to declare how unhealthy huge up days are. But history does not confirm that belief, huge up days have often been a sign that a major bottom was in and a new market advance starting. We are now 3 weeks later and the S&P 500 closed at 2610 yesterday, up another 5.8% since the close of that huge up day on December 26. Bond investors tend to wait a whole year to earn a 5.8% roi, so it’s always nice to do it in less than a month. That’s how knowing a little bit of price action history can help a stock investor.

Now the same investors and writers, who have of course missed the rally or are stuck in short positions, are out to tell that stocks always retest the lows after a rebound rally like this. But is that so? Or is it just their hope speaking?

How does a market behave after a bear market low? Does it often (or always) retest the lows? We don’t know yet if Dec 26 was the bear market low. The strong up day suggests that the market will be higher a year from now, but nothing is written in stone.
Whatever the odds of a further decline or a rally to new highs might be right now, there is only two main scenarios going forward from the current point. If Dec 26 is not the low of this bear market, then it is off course certain that the recent lows will be retested and broken. If on the other hand Dec 26 was the low, then will we see any kind of retest of that low? That’s a scenario we can test by studying the price action after past bear market lows.
One can argue about what is or isn’t a bear market. The criteria are not set in stone. Usually 20% decline is the threshold used to define a bear market, but there have been a few 19.9% declines which just managed to avoid the bear market stigma. So, I prefer to use an 18% or more decline to find the bear market lows I want to study.

So, here we have the historic examples (prior to 1950 the Dow Industrials is used, S&P 500 charts from 1950 onwards). I look for about 10% rally over the course of several weeks after the low and then we can see how much of a pullback or retest typically comes after that first rally:

1921 Bear market low. This was a severe bear market. First rally took the market up 10% in a few weeks but it never looked back and only chopped sideways for a few weeks before heading higher.


1929 Crash low. This one wasn’t the bear market low. But a 50% advance over 6 months could have been felt like a new bull market. The first rally after the November low was retraced about half by the next pullback, but nothing like a retest of the lows.


1932 Bear market low. First rally after the depression lows was retraced about 70% in the next decline. Those lows would never be revisited.


1938 Bear market low. First rally after the lows saw about 50% give-back and then continued higher.


1942 Bear market low. WW2 lows were followed by a steep advance. Only a few brief 2% pullbacks. Traders that were waiting to buy on a good pullback or retest of the lows never got much of a chance.


1946 Bear market low. Post WW2 bear market low saw several retests of the lows in the ensuing years, with the last one coming in 1949, which bottomed out just above the 1946 low.


1957 Bear market low. A mild 20% bear market. First rallies after the low were rather weak 5-6% advances alternating with pullbacks to retest the low. Just a choppy continuation of the prior bull market.


1962 Bear market low. Another mild bear market. The first significant rally was given back 80% in a near retest of the prior low.


1966 Bear market low. Another mild bear market. Here there was little or no give-back after the first significant rally and investors got no second chance to buy (or cover) near the low.


1970 Bear market low. Significant bear market. First rally after the low was retraced about 80% in a near retest of the low.


1974 Bear market low. Severe bear market. First rally off the lows was given back about 75% in the next decline.


1978 Bear market low. Mild bear market. Gave back a little over 50% of the gains of the first rally but no real retest of the lows.


1982 Bear market low. Very steep advance after the bottom and no pullbacks that allowed investors to buy (or cover) anywhere near the lows.


1987 Bear market low. More a crash than a bear market. Here we got a fair retest of the lows before advancing.


1990 Bear market low. Mild bear market. Gave back about 50% of the gains after the first significant rally.


1998 Bear market low. No significant pullback or retest of the low after this short bear market. Traders that had gone short were forced to cover at a loss and that helped to propel the market higher.


2002 Bear market low. Major bear market. First rally was given back 90%, so this can be seen as a proper retest.


2009 Bear market low. Severe bear market low. No pullback, much less a retest, worth talking about.


2011 Bear market low. Mild bear market. The first significant rally after the low was retraced about 60%. Traders who hoped for a retest are still waiting.


2018 Possible bear market low. We got a 10% rally of the recent low. But we can’t know yet if Dec 2018 will stand as the low of this move.


So, what to expect? There are two big challenges in trading the market at the current point. One is that we don’t (and can’t) know whether the late December low was the end of a bear market or just the first innings of a bigger decline. Stock markets and economies, just like earthquakes and a range of other natural phenomena, display a property known as “self-organized criticality“. Any Richter 4 earthquake could be a foreshock for a larger Richter 7 earthquake, but it could also be the main shock, one and done. In the same way any 10 or 20% drop in the stock market could be the foreshock in an ongoing bigger decline (see 2008), but it could also be a mild bear market that is over already. Known parameters like debt levels in the economy, interest rates, or p/e ratios do not allow us to predict what will be the case. It is unpredictable because we can’t tell with any certainty where the critical point is in a self-organizing complex system. Some shocks are the lead-in to bigger shocks, and some aren’t. And sometimes you get aftershocks, but not always…
The second challenge is that even if we could conclude (or hope) that the low is in, we then wouldn’t really know if that low will get retested or not. The average pullback after a first significant rally from a bear market low has been about 50% of the first rally gains. But sometimes you get an almost full retracement and sometimes there is no pullback at all. The S&P 500 is now at 2610, up from 2350 a few weeks ago. A 50% give-back would send the market back to 2480 if 2610 is the high of the first move (which we don’t know yet either). But it is equally possible that there is only a shallow pullback of a few %, which would e.g. take the S&P to 2550 before heading higher already. That can become highly uncomfortable for investors who wait for a pullback to buy or a chance to cover shorts. On the other hand the S&P could go for a retest of the lows and then you would feel pretty stupid if you bought at 2550 or even 2480.
The market never gives us easy edges in one way or another. The best approach is not to get too hung up with any possible outcome, bearish or bullish, and try to feel what the market IS doing from a neutral point of view. Being aware of the different outcomes that have happened in previous similar occasions gives us some sense of what we might expect now. People with strong opinions about upcoming bear or bull markets are usually only prepared for outcomes that confirm their belief. It is better to be prepared for all outcomes and have some sense of the odds for each of those possible outcomes. That’s what studying those charts of historic lows can be used for.
We may be in a bull market that goes on for another 10 years. Or we may be in the early stages of a 50% bear market and a major recession. There is no way to tell because of the self-organizing properties of an economy. That’s why I go with the flow until the market shows me that the flow has changed course, and then I go with the flow again…

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Stocks and bitcoin

Posted by Dan on November 20, 2017

Stocks have basically gone sideways so far this month. Since the November 9 drop the S&P 500 is trying to climb back, but it looks like a tired effort. Meanwhile bullish participation continues to weaken, as reported in my weekly reversal levels outlook.

The lunar green period is about to end, so it will be interesting to see what comes next. Here is the current S&P 500 chart:

^SP500 (Daily) 2_11_2016 - 11_17_2017

This index keeps pushing into an important trendline. But my Earl indicator is showing a multi-month bearish divergence. And the slower Earl2 (orange line) keeps moving lower with no signs of a bottom. The MoM has cooled off since peaking into the +8 zone in mid October.
While all those warning signs have not resulted in any significant downside action so far, it doesn’t mean the market is becoming safe. Sometimes the real drop comes at the very end of a longer sideways period.

A few readers have asked about my bitcoin targets. Since my August post, the next target of $6430 was reached quickly. And I had one higher target, posted on Twitter a few months ago:

I would not be surprised to see stock markets and bitcoin reach important peaks together, before entering “cooling off” phases. With bitcoin now well above $8000 a move to my higher target at $9374 looks realistic here, and yes an overshoot to just below $10 is possible too. I would expect some serious profit taking if $10k is approached. Here is an updated chart:


Bitcoin is bumping into an overhead resistance line and a jump above $9k would look like a breakout. But false breakouts are a fairly common way of ending major bull markets. A one or two day jump to $10k that is quickly reversed would be a textbook blow-off peak. The ELC indicator has peaked out already and such a move would paint a clear bearish divergence. I will keep you posted on Twitter.

Posted in Market Commentary | Tagged: , | 4 Comments »

Narrow range

Posted by Dan on September 18, 2017

The S&P 500 has climbed just above 2500, technically breaking out above its early August highs. But this doesn’t make the market any easier to read because we remain stuck in a narrowing range. Here is the updated chart:

^SP500 (Daily) 12_8_2015 - 9_15_2017

The narrowing range, as shown by the blue lines in this chart, will inevitably be abandoned sooner or later and that will probably set the direction of trading going into 2018. We remain in a lunar green period and the LT wave for September stays positive until the end of this week. So we could see 2520 in the coming days. But the Earl is peaking out, so it looks like the stage is being set for another pullback.
I wouldn’t be too aggressive with bets either way at this point. I would just wait for the breakout from narrow range and then go along with the new trending move (up or down).

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Where does the Euro strength come from?

Posted by Dan on September 14, 2015

Stock market volatility has calmed down a bit and most markets ended the week on a positive note. We have a few more lunar green period days to go and then we will enter a new red period. If the market is going to retest and possibly take out its recent lows, then its best chance to do so is probably in the second half of September.
Let’s have a look at the situation in the S&P 500 (click image to enlarge it):

S&P 500

The S&P is looking for direction after the late August drop. If the market pushes higher then 2050 could be reached fairly quickly. The slower Earl2 indicator (orange line) has turned up from a major low, which is good to see, but that doesn’t rule out another leg lower in the next couple of weeks. The faster Earl (blue line) is going quite high already and may turn down this week. I think the better odds are for a push towards 2040, followed by consolidation for the rest of the month.

A lot of traders will be watching central banking decisions this week. I don’t know whether it will make any difference. I can easily imagine interest rates being nudged higher and see stocks go up rather than down as a result. Would be a typical example of “sell the rumor, buy the news”. Many investors have been selling the ongoing rumor that rates are going to be hiked, so who will be left to sell? It is the uncertainty of an upcoming rate hike that has been hanging over the market for months, and once the step is taken that uncertainty is taken away. We can actually ponder what would be more positive for stocks: keeping rates at zero while telling people that the economy remains too weak… OR raising rates and telling people that the economy is strong enough to do so?

As chart of the week I am choosing the Euro versus Dollar, because it may also contain clues going forward. The Euro has been surprisingly resilient recently (click image to enlarge it):


Since March the Euro has been painting higher highs and higher lows. The 1.15 level has been major resistance for a while and the most recent attempt to break out above it failed. Bullish energy (green in the iceberg chart) is once again rising quickly, so a second attempt appears to be in the making. It is not clear where this Euro strength is coming from. But it is not rare for markets to move first, with the fundamentals that justify the move becoming clear later on. Anyway, a successful break above 1.15 would open the door towards 1.25.


Posted in Financial Astrology, Market Commentary | Tagged: , , | 4 Comments »

When will the moon blink?

Posted by Dan on July 20, 2015

Stocks rallied strongly last week, and another lunar green period has ended with handsome gains. The lunar cycle keeps up its perfect record for the year. This is a highly unusual winning streak. If we consider the odds of correctly guessing the direction of the market over a given period at 50%, then getting it right 14 periods in a row has a 1 in 16384 chance. Just try tossing a coin until you get heads 14 times in a row.
Historically the lunar periods “work” about 60% of the time. Even if we consider 60% chance of success, getting it right 14 times in a row is a rare 1 in 1276 occurrence. So, it will probably take nearly 1000 years until a similar winning streak for the lunar green and red periods can be seen again.

A new lunar red period is now starting and we keep waiting for the first lunar cycle miss of the year. When it comes it will give us an important read on the market, as it will probably indicate the direction of the next major trending move in the markets and a departure from the mostly sideways trading we have seen since the beginning of 2015.
Let’s have a look at the S&P 500 (click image to enlarge it):

S&P 500

After a false breakout to the downside the S&P is now climbing strongly. All my indicators are pointing up, but the Earl and MoM indicators are getting quite high already. The Earl2 has much more room to rise, so any pullbacks could be short lived. The June highs and the 2150 level are first overhead resistance for the S&P, and that’s where this rally could stop to take some breath.
But I wouldn’t be surprised if this becomes the period in which the moon blinks. Investors have been cautious for quite a while, and if the S&P pushes above 2150 then more money will come pouring in. Many traders are realizing that bonds are going to be rubbish in a rising rate environment, making selected stocks look more attractive as long as the economy keeps doing OK. If this comes to pass then the S&P can get to 2300, with the Dow pushing towards the magical 20k level in August.

Stay tuned.

Posted in Financial Astrology, Market Commentary | Tagged: , , , | Leave a Comment »

What can rally stocks?

Posted by Dan on July 6, 2015

Stocks have been pressured by the uncertainty over the Greek referendum last week. Of course, the result of that vote was already available on Google trends days ago, as I suggested in my quick post yesterday. What kind of reaction can we expect this week? Let’s have a look at the S&P chart (click image to enlarge it):


We are now in a new lunar green period. The lunar cycle has maintained its perfect record so far in 2015. If it is to keep going for another period then stocks need to rally for some reason or other.
The S&P has fallen back to a long term support trend line. My technical indicators are all in bottom territory, but not turning up yet. So, there is potential for some rally to start in the next week. News from Greece can still swing the market either way, but I don’t think some kind of resolution can be postponed much longer. And any kind of “solution” may trigger a rally.


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Disappointing days can be bullish

Posted by Dan on January 14, 2015

Yesterday the stock market opened higher, climbed even more and then started sliding, only to end the day down and down more than 1.5% from the intraday highs it had reached just a few hours earlier. That’s as disappointing as days can get for people who own stocks, other than a crash of course. Here is how the market action looked like for the S&P 500:

S&P intraday

Social media were full of messages how bearish this kind of market action is, as if people had been waiting for this. And yes, the logic seems to make sense: if the market cannot hold on to early gains, then sells off more than 1.5% intraday, it can hardly be seen as a sign of strength. The problem is: when was the last time the market was logical?
No matter how logical a trading concept may appear to be, and no matter how many experienced traders are telling you about it, it is always important to test. And we have plenty of stock market history to verify what really happens after this kind of disappointing days. So, that’s what I did. Here are the results.

I defined a disappointing day as a day on which the market opens above the previous day’s close, but ends the day below it. And the market must be down 1.5% or more from the intraday highs it reached to qualify as a disappointing day. To test what typically happens next we then look where the market was 5 and 20 trading days later, compared to the closing price on the disappointing day as defined above.

For the S&P 500 I found 143 of those days since the early 1980s. In 54.5% of the cases the market ended up being higher 5 days later, and in 57% of the cases the market was higher 20 trading days later (20 trading days is about 1 month). The average expectation is slightly positive, both after 5 and after 20 days. In 8 cases the market was down more than 6% after 5 days, and in 6 cases it was up more than 6% after 5 days. In 25 cases the S&P was up between 3 and 6% in the next 5 days, and in 47 cases the market climbed between 0 and 3%. Here is the complete distribution chart:


Looking where the market went after one month. In 20 cases (14%) the market was down more than 6% after 20 trading days and in 23 cases (16%) the market was up more than 6%. This chart shows all results for 20 days later:


I did the same test on the Nasdaq since the 1980s, which gives us a larger sample of 385 cases thanks to Nasdaq being more volatile. Also here we find that in 57% of the cases the Nasdaq is up 5 and 20 days after a disappointing day. In these 385 cases the Nasdaq has on average climbed 0.5% within 5 days, which is over 26% annualized. This means that a disappointing day like the one we have seen yesterday has historically been a bullish sign, not a bearish one. The average gain 5 days later is 3.5% and the average loss 5 days later is 3.55%. But there is a gain 57% of the time, so going short after a disappointing day has not been a profitable strategy in the last 30 years.

Here is what happened 5 days after a disappointing day in the Nasdaq:


In 26 cases the Nasdaq was down more than 6% after 5 days, in 37 cases it was up more than 6%

Here is what happened 20 days after a disappointing day in the Nasdaq:


In 44 cases (11%) we see the Nasdaq more than 10% lower after 20 days. In 58 cases (15%) the Nasdaq is more than 10% higher after 20 days.

Bottom line: a disappointing day in the market is more or less neutral with 57% odds that the market will be higher one week and one month after this day. The idea that this kind of days are a bearish omen is thus not supported by history. Slightly more often than not it is actually very bullish going forward. If there is anything bearish about these disappointing days then it will take additional qualifiers to get it to work. If you have ideas or links to similar studies then feel welcome to post them as a comment.

Good luck,

Posted in Market Commentary | Tagged: , , , , | 4 Comments »

The next breaking point

Posted by Dan on August 4, 2014

In our most recent review of the S&P 500 we pointed out the market was at a breaking point, with all my indicators pointing down. US markets have indeed gone over the edge last week, and the rather quick drop has brought them right to the next breaking point. Here is the current S&P chart (click for larger image):

S&P 500

The S&P has dropped to support at long term trend line (green line) near 1930. Will buyers appear at this level? Maybe, maybe not. None of my technical indicators show any sign of a bottom at this point, but that could change if the market manages to hang on to this 1925 level for several more days. Clearly, the prospect for new highs in August, as we discussed in last week’s post, is now a more remote scenario.
Meanwhile, the Nasdaq sits right at the 4350 level, the July lows. This keeps the possibility alive for another run to 4500+… IF buyers show up this week.
Bottom line: both the S&P 500 and the Nasdaq are at a next breaking point. And the technicals still look poor. I think the odds for a rebound or sideways “hanging-on mode” are fairly equal to the odds of a quick further drop this week. If the current support level gives way then I would look for 1880 and then 1730 as likely downside targets for the S&P 500. If buyers show up at these levels then this will be another whipsaw move that is quickly forgotten.

Good luck,

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