Global breadth remains supportive for stocks

As the trade war impacts the U.S. economy, global breadth remains supportive for stocks. Today’s headlines:

1. Global breadth
2. Defensive stocks outperforming
3. Imports and exports hit by trade war
4. Mortgage Refinance Index spikes
5. Will the S&P catch down to oil?
6. Is the NASDAQ short term overbought?

Go here to understand our fundamentals-driven long term outlook. For reference, here’s the random probability of the U.S. stock market going up on any given day.

Global breadth

Over the past half year, the media and social media have been constantly ringing the alarm bells about a “global recession”. But despite fears of a global recession, the global Advance-Decline Line (breadth) has made a new high.

This is because while the U.S. has been weighed down by a trade war, countries that are more unrelated to the U.S.-China trade war have made new highs. E.g. Switzerland, Australia, India, Russia. Here’s Switzerland and Australia.

Here’s what happens next to the S&P when it falls over the past 30 days while the Global Advance-Decline line makes a new 1 year high.

The S&P tends to go up 9-12 months later. Note that this isn’t infallible, because ex-U.S. stocks were doing very well in Q1 2008 as a recession began.

Defensive stocks outperforming

Defensive sectors have outperformed cyclical sectors from May – present. Here’s XLP (consumer staples – defensive) vs. XLY (consumer discretionary – cyclical).

Is this bearish behavior? Here’s what happens next to the S&P when XLP goes up more than 3% in the past 30 days while XLY falls more than -1%.

Here’s what happens next to XLP

Here’s what happens next to XLY

XLP tends to perform poorly over the next 2 weeks.

It’s worth noting that XLP has gone up 8 days in a row.

Imports and exports hit by trade war

From CNBC:

• The nation’s two busiest container ports, the Los Angeles and Long Beach, on Tuesday reported declines in export volumes in May, amid the ongoing trade war with China.
• The two port complexes together handle about 40% of the nation’s containerized import trade with China.

Trade volumes tend to collapse in a recession, but the current collapse is moreso associated with the trade war. The next chart illustrates how the Port of Long Beach’s imports have fallen more than -19% over the past year.

That’s quite an extreme. Here’s what happens next to the S&P when the Port of Long Beach imports falls more than -19%.

Mortgage refinancing

Bloomberg noted that the U.S. Mortgage Refinance Index spiked this week.

Bloomberg’s hypothesis is that Treasury yields may fall even further due to a surge in refinancing.

Is this true?

Here’s what happens next to the 10 year Treasury yield when the Mortgage Refinance Index spikes more than 40% from its previous reading.

Treasury yields tend to go up 2 months later, and then fall 9 months later.

Here’s what happens next to the S&P 500.

Will stocks “catch down” to oil?

The U.S. stock market has been tightly correlated with oil over the past 9 months. But while U.S. stocks bounced recently, oil is making new lows.

Here’s what happens next to the S&P when it rallies more than 10% over the past 5 months while oil falls, and their 5 month correlation is greater than 0.5

The S&P’s 1-2 week forward returns are more bearish than random. (Sample size is also small, so take this with a grain of salt).

Here’s what happens next to oil

NASDAQ overbought?

And lastly, Helen Meisler had a good article on Real Money:

I was asked if the fact that the Nasdaq TRIN (Trading Index) is so low is bothersome. It is true that when the moving average is so low Nasdaq tends to have a pullback. Most of the time the pullbacks were short lived, but I would say that this indicates an upcoming overbought condition.

I don’t really monitor TRIN on a day-to-day basis, so I decided to run the numbers and examine this indicator.

Here’s what happens next to the NASDAQ when the NASDAQ TRIN’s 10 day moving average falls to 0.77, while the NASDAQ is above its 200 dma

This happens quite often, and doesn’t seem consistently bullish or bearish on any time frame. Perhaps I’m examining TRIN incorrectly. Either way, I don’t follow this indicator on a regular basis.

We don’t use our discretionary outlook for trading. We use our quantitative trading models because they are end-to-end systems that tell you how to trade ALL THE TIME, even when our discretionary outlook is mixed. Members can see our model’s latest trades here updated in real-time.

Conclusion

Here is our discretionary market outlook:

1. The U.S. stock market’s long term risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
2. Most of the medium term market studies (e.g. next 6-9 months) are bullish, although a few of trend following studies are starting to become bearish.
3. Market studies for the next 2-3 months lean bullish
4. Market studies over the next 1-2 weeks are mixed.
5. We focus on the medium-long term.

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