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.