Simple Rule — Returns to Bearish Signal

After flipping back to a bullish condition towards the end of 2022, our Simple Rule (for the S&P 500 index) has just switched back to being bearish…..for the first time since early 2022.

A key fundamental indicator turned bearish a month or so ago. As a result, the technical tests took over and as of today, the S&P 500 closed down at a level that signaled a near-term bearish forecast for the index.

Simple Rule turns Bearish

Back in March, one of our four macro tests generated a bearish signal, and since all four of these macro tests must be bullish to prevent the technical test from getting activated, we immediately looked at the technical results.

And at that time, in March, the technical test was not yet bearish. Once again, in April (since the technical test is a monthly test, we look at monthly readings), this test was getting closer to turning bearish, but not yet. Now in May, this technical test did flip to generating a bearish signal….meaning that the signal says to exit the S&P 500 index, as a whole (once again, this is not a signal about any one constituent of the S&P).

While we are in bearish mode now, it’s important to note that the original bearish macro signal went negative by only a small margin in March. This suggests that it’s entirely possible that this signal could flip back to a bullish reading in the next month or so. And if this happens, then the technical test shuts down, and the Simple Rule would return to a bullish overall signal.

For the record, this signal change to bearish mode is taking place when the S&P 500 index is down less than 19% from peak (close on 5/20/22 relative to close on 1/3/22), so an interesting test will be to revisit this call over the next few months and to see if the S&P falls much more than 19%. If it does, then this bearish call, if acted on by exiting the S&P now, could prevent further losses.

We’ll see.

Early 2022 Update–Cautiously Bullish

In the roughly nine months since we last posted, the S&P 500 has performed as expected. In this time, our Simple Rule was flashing a bullish signal and indeed the S&P 500 did deliver a solidly positive result during this same time period.

Today, despite the fact that a couple of our fundamental indicators are showing signs of weakness, all four of these indicators are still bullish.  Therefore, since none of these four indicators is bearish, the technical indicator test is not applicable.  And the result is that the Simple Rule is still flashing a bullish signal overall.

Given the current 10% correction in the S&P 500, from its all time highs, it’s certainly worth paying closer attention to both the fundamental and the technical aspects of our Simple Rule, especially over the next few months.

That said, it’s worth pointing out, that our Simple Rule does typically accept such 10% corrections (and actually even more than 10%) without necessarily switching to a bearish signal.

So let’s see what develops, especially on the fundamental side, over these next two to three months.

Simple Rule Remains Bullish

Almost one full year has gone by since we posted that our Simple Rule has flashed a bullish signal. And the 11 months since this post have strongly supported the signal. The S&P 500 has soared since that time, setting all-time record highs in almost every month since late 2020.

Today, the signal remains intact. While the fundamental portion of the Simple Rule is still showing a bearish signal (mostly due to the employment data in the US), the Simply Rule’s technical signal does not confirm the bearish fundamental signal. Instead, the technical signal in our Simple Rule is still firmly bullish.

So we remain bullish on the S&P 500.

Simple Rule Flips to Bullish

As of Friday, May 29, our Simple Rule switched back to a bullish outcome.

Several comments about this:

First, the timing of our bearish signal worked well. An exit from the S&P500 on that day, February 28, would have allowed one to avoid huge losses, losses that peaked in the second half of March….about three weeks after the bearish signal was generated.

Second, the timing of this subsequent bullish signal is not typical. All bullish reversals over the last several decades in US market history have taken more than three months to occur. Since this current flip back to a bullish signal took only three months, there may be an increased risk of a false signal, and therefore a possible whipsaw if the Simple Rule flips back to being bearish in the near future.

Third, while this new bullish signal has materialized in the S&P500 index, it has not materialized in other indices such as the Russell 2000. Also, the primary reason behind the recent strength of the S&P500 is the out-sized positive impact of several huge tech stocks such as Amazon, Apple, Google and Microsoft. Without these top five or six tech names, the rest off the S&P500 would still be in a bearish condition, as defined by out Simple Rule.

So these next few months will be critical in determining if the recent rally in the S&P is truly the start of a new bull market cycle or if it’s simply a huge bear market rally that will soon break down.

Simple Rule Flashes Red!

On Friday February 28, 2020, our Simple Rule generated an overall bearish signal, for the first time in over a year. This means that not only did our fundamental signals generate a bearish signal but that our technical signals also confirmed this bearish signal. Clearly this happened after the monstrous sell-off in the US equity markets in the week ending February 28th.

It’s very important to remember that this bearish signal does not apply to any single equity security. Instead, it applies only to the entire S&P500 index as a whole.

So as of now, our Simple Rule is suggesting that one should exit any long positions in the S&P500 index, and go to cash or cash-equivalent securities.

Simple Rule Flashes Yellow

In the third week of October, our Simple Rule finally signaled a change: while still giving an overall bullish signal on the S&P 500 index, it did so with a caution message attached.

Our Simple Rule is based on two fundamental buckets of analysis—one fundamental and one technical. A few weeks ago, the fundamental bucket turned bearish, and this happened due to the breakdown in US economic reports.

In our system, the bearish signal in the fundamental bucket proceeded to activate the technical bucket. And the technical analysis that we use is still—as of the end of October—bullish on the S&P 500 index.

As a result, we remain bullish on this large cap index. However, this bullish signal is now closer to reversing (to a bearish signal) than it has been since the beginning of this year.

No Change in Stance—Still Bullish the S&P500

While two months have passed, our Simple Rule continues to work. The rule signaled a bullish stance back in May, and in fact the S&P500 has risen since then.

Today, at the end of July 2019, our Simple Rule remains bullish, on the S&P500 index overall. As a reminder, this signal does not pertain to any individual component of the S&P500, but to the aggregate of the 500 components.

While both the fundamental and technical categories of our Simple Rule are bullish, the fundamental component is still edging closer to generating a bearish signal. If the US economy moves towards contraction (and judging by the fact the the Federal Reserve is scheduled to lower interest rates today…for the first time since 2007….it’s looking more likely that a recession is approaching), then we expect that this fundamental signal will rapidly switch to being bearish.

Let’s see what happens to US economic data in August.

Simple Rule is Still Bullish

After sliding about 5% over the last four weeks, and then recovering a couple of percentage points, the S&P500 still sits only about 3% below its all-time highs.

Two economic reports that form the core of our Simple Rule were released last week. While both reports suggest that the US economy is weakening over the last month, these reports are still suggesting that the US economy is growing. In addition, the remaining economic components of our Simple Rule also suggest that the US economy is not contracting.

Since all of the economic components of our Simple Rule are showing expansion, the investment signal is still bullish…for the S&P500 index as a whole.

We update the economic reports in our Simple Rule on a monthly basis, and until the economic reports begin to show contraction, we will submit summary comments on the US equity markets only once a month. Until the economic reports that we follow turn down, more frequent analysis would not materially affect our position on the US equity markets.

S&P500 Continues to Climb Higher

Despite two weeks of weakening US economic data, the S&P500 continued to push higher. As of Friday’s close….at 2,905….the large cap index now stands at less than 1% below its all time highs, highs reached last fall, about seven months ago.

So without any major news or developments, the S&P500 has almost recouped its entire 20% loss, the loss that peaked at the end of December 2018.

Over these last two weeks, industrial production missed badly. Wholesale trade also missed. Factory orders shrank. Consumer and producer inflation came in hotter than expected. On the positive side, retail sales have rebounded slightly from their abysmal drop two months ago. And initial jobless claims continue to hover near 40 year lows.

At the same time, the Federal Reserve’s balance sheet continues to shrink, which is ironic because when the S&P500 was bottoming in late 2018, many experts were pointing to the Fed’s quantitative tightening as one of the leading culprits behind the market losses. But now, several months later….after the S&P has bounced massively….the Fed’s balance sheet is substantially smaller than it was in December 2018. Apparently, the impact of the Fed’s balance sheet is less than many experts had feared it was.

The technical picture for the S&P is now mixed. The weekly charts are now solidly bullish, but the daily charts are starting to show some weakness. Perhaps a modest pullback is around the corner; even a 2-4% drop would be sufficient to satisfy the weakness shown in the daily charts.

Finally, our Simple Rule is still bullish, after temporarily turning bearish a couple of months ago. That said, the fundamental components of this Simple Rule are weakening; while they’re still positive, it would not take much more weakening in US fundamentals to flip them to a bearish stance. Let’s see what the US economic data does over the next several weeks.