Our Simple Rule Goes Bullish but only Temporarily

Last week, and for the first time in all of 2019, the S&P500 gave back a material amount of gains. The index closed down almost 2.2%. Volume was light, so there was no rush for the exits. But volatility jumped: the VIX index moved from about 13 to about 16, after temporarily moving above 18.

Once again, the S&P failed to break above—and stay above–the 2,800 level. Something similar happened in both November and December 2018. This is concerning because for the bulls to successfully argue that the bull market is still in effect, not only does this 2,800 level need to be reclaimed, but the index must advance back to the old highs (close to 2,950) set October 2018 and then set new highs. But now that investors have tried—and failed—to do this three times over the last six months, many experts are getting concerned, and rightfully so, that further gains are limited. What’s worse: the argument that the all-time highs, in this bull market cycle, are behind us becomes stronger.

On Friday February 19th, our Simple Rule, interestingly, changed from being bearish back to being bullish. Keeping in mind that our rule has two major parts, a fundamental part and a technical part, it’s important to note that the fundamental part of the rule did not flip from being bearish to bullish; instead it remained bearish. What changed on February 19th was the technical component, which flipped to bullish on February 19.  And based on the way the Simple Rule is designed, this conflicting set of signals is resolved in favor of the technical component, meaning that the overall signal became bullish again.

But as of Friday, March 8—after the material loss in the S&P500—the technical component of our Simple Rule flipped back to being bearish. So now, combined with the unchanged bearish fundamental signal, our overall signal returned to being bearish.

Given that our Simple Rule is extremely slow moving, this whiplash is very unusual. So let’s see how the US equity markets behave over the next several weeks; specifically, let’s see if they act in accordance with our signal.

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