Simple Rule Flips to Bullish

June 4, 2020

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.