Headlines
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Nothing is oversold:
Not a single one of the markets we follow are showing pessimism, while a large percentage of them are displaying excessive optimism. This seems like it should be a negative sign of broad-based risk-taking, but that's precisely why it has been a good longer-term sign. We've only seen this during periods of sustained recoveries.
The Nasdaq's short road back to even is golden:
The Nasdaq Composite has almost fully recovered from its large pandemic decline. It has gone from more than 30% below its 52-week high to within 1.5% of it. Every time it has cycled so far, it has been able to fully retake its previous high, usually within weeks.
Economic surprises turning positive: The Citi Economic Surprise Index for the United States has turned positive, mere weeks after the worst reading in its history. We'll have a more in-depth look at this change on Friday, showing other times when it cycled from a period with extreme negative surprises to net positive ones. It was a moderately good sign for stocks, with the S&P 500 higher three months later 5 out of 6 times. It was mostly negative for bonds and the dollar.
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Smart / Dumb Money Confidence
Smart Money Confidence: 51%
Dumb Money Confidence: 75%
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Risk Levels
Stocks Short-Term
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Stocks Medium-Term
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Bonds
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Crude Oil
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Gold
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Agriculture
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Research
BOTTOM LINE
Not a single one of the markets we follow are showing pessimism, while a large percentage of them are displaying excessive optimism. This seems like it should be a negative sign of broad-based risk-taking, but that's precisely why it has been a good longer-term sign. We've only seen this during periods of sustained recoveries.
FORECAST / TIMEFRAME
None
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For the first time in a long while, not a single domestic or overseas index, ETF, bond, or commodity we track is oversold.
The Phase Table is showing that the Phase 1 column is totally blank. At the same time, the Phase 3 column, which shows funds displaying extremely high optimism, is lengthy.
Phases are determined by the level and direction of the Optimism Index (Optix) for each fund. To reduce noise, we use a 10-day average of the Optix for ETFs and a 5-day average for futures. If the Optix for a fund is in extreme pessimism territory, it goes into Phase 1. If it's in extreme optimism territory, Phase 3.
There haven't been many days over the past 15 years when there were no funds in Phase 1 and at least 35% of them were in Phase 3. All of these days have triggered since the financial crisis.
Since the past decade was dominated by a rising trend, it's no big surprise that forward returns were also positive. The risk/reward was good, and the z-score over the medium-term was also quite good. The z-score looks at returns after the signals compared to a random return, adjusting for the standard deviation among returns and the size of the sample. The higher the score, the more it suggests that the signal is showing us "something." It's harder to get a large z-score with a small sample size.
For bonds, it was a bad sign.
Even though TLT has been in a pretty steady uptrend during the study period, it showed a negative return over the next 1-2 months following these signals. When investors were in risk-on mode to such a degree that there was not a single market showing pessimism, it was a sign that bonds were not in favor.
This should be another good sign for stocks. We're not assigning a forecast and including it in the Active Studies only because of the small sample size.
BOTTOM LINE
The Nasdaq Composite has almost fully recovered from its large pandemic decline. It has gone from more than 30% below its 52-week high to within 1.5% of it. Every time it has cycled so far, it has been able to fully retake its previous high, usually within weeks.
FORECAST / TIMEFRAME
QQQ -- Up, Long-Term
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The Nasdaq Composite has almost fully made back all of its losses. After falling more than 30% from its 52-week high, the tech-heavy index has almost retaken that high, pulling within 1.5% by Wednesday. This is, by far, the fastest turnaround in its history.
By the time the index cycled from more than 30% below a 52-week high to within 1.5% of it, as it did on Wednesday, it never failed. It closed at a fresh 52-week high within three weeks every time.
Even when looking at smaller 20% drawdowns, it also never failed, closing at a new high within 23 days every time, and showing gains a year later every time as well.
The risk/reward ratio after these recoveries was impressive across all time frames. While the Nasdaq didn't necessarily keep soaring every day, shorter-term periods of digestion tended to be minor. By the time buyers had reached this point, they were not about to give up.
For the S&P 500, the Nasdaq's recovery was also a good sign.
The S&P didn't show as pristine a record as the Nasdaq, but it's forward returns were still excellent. If buyers had enough interest in the higher-risk stocks trading on the Nasdaq, then it was a generally good sign all around.
Like the breadth thrusts and recoveries, signs like this are hard to ignore, especially over medium- to long-term time frames.
The Nasdaq has also enjoyed a "golden cross", a mostly ineffective signal that gets a lot of attention regardless. The curious thing about the current cross, when the 50-day moving average rises above the 200-day average, is that it triggered when the Nasdaq was already so close to an all-time high.
That didn't seem to dampen its forward returns much. It was not a great buy signal, but it was not a consistent reason to sell, either.
Returns were more consistently positive when the cross happened with the Nasdaq more than 5% below its all-time high, so it would have been more of a buy signal if prices hadn't already run so much.
Active Studies
Time Frame | Bullish | Bearish | Short-Term | 0 | 1 | Medium-Term | 8 | 4 | Long-Term | 38 | 1 |
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Indicators at Extremes
Portfolio
Position | Weight % | Added / Reduced | Date | Stocks | 38.9 | Reduced 10% | 2020-05-13 | Bonds | 0.0 | Reduced 6.7% | 2020-02-28 | Commodities | 5.1 | Added 2.4%
| 2020-02-28 | Precious Metals | 0.0 | Reduced 3.6% | 2020-02-28 | Special Situations | 0.0 | Reduced 31.9% | 2020-03-17 | Cash | 56.0 | | |
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Updates (Changes made today are underlined)
In the first months of the year, we saw manic trading activity. From big jumps in specific stocks to historic highs in retail trading activity to record highs in household confidence to almost unbelievable confidence among options traders. All of that came amid a market where the average stock couldn't keep up with their indexes. There were signs of waning momentum in stocks underlying the major averages, which started triggering technical warning signs in late January. The kinds of extremes we saw in December and January typically take months to wear away, but the type of selling in March went a long way toward getting there. When we place the kind of moves we saw into March 23 into the context of coming off an all-time high, there has been a high probability of a multi-month rebound. After stocks bottomed on the 23rd, they enjoyed a historic buying thrust and retraced a larger amount of the decline than "just a bear market rally" tends to. Those thrusts are the most encouraging sign we've seen in years. Even through early June, we're still seeing thrusts that have led to recoveries in longer-term breadth metrics. By early May, we were seeing some troubling signs of shorter-term speculation, and buyers have run right over those. This is what bull markets do. In bear markets, they don't get a chance, as sellers tend to come in as soon as sentiment moves to neutral or slightly optimistic. That didn't happen this time, and the rally has gone way further, and way longer, than "just a bear market rally" does. I am the world's worst momentum trader, and this is one of the most anguishing kinds of markets for me. I detest chasing prices higher, especially in the face of readings like high Dumb Money Confidence and small trader call buying. I recognize the overwhelming positives of the recoveries noted above, and it's impossible to ignore the medium- to long-term positive implications. I'm holding out on adding exposure for now, based on the negatives that have been generated (and so far failed), at the risk of falling further behind a new roaring bull market.
RETURN YTD: -5.7% 2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%
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Phase Table
Ranks
Sentiment Around The World
Optimism Index Thumbnails
Sector ETF's - 10-Day Moving Average
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Country ETF's - 10-Day Moving Average
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Bond ETF's - 10-Day Moving Average
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Currency ETF's - 5-Day Moving Average
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Commodity ETF's - 5-Day Moving Average
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