It’s Still a Bull, Regardless

Still a Bull, Regardless

It is an obvious statement when we say that no person, and no artificially intelligent deep-learning algorithm can predict the future of the stock market. All that can be accomplished is an approximation based on past behavior. No two markets are ever identical in their trading, but Human behavior has not fundamentally changed since rudimentary markets began in the middle-ages, and so the broad-brush strokes of fear and greed continue to be visible in today’s markets.

This continues to be so, even though 70% of trading in the important markets is being done by AI robots. The reason that the robots continue to trade as if they were Human, is simply because the robots learned how to trade by analyzing historical data that was created by emotional Human traders; robots are doing the same things that traders have always done, only much faster and more often. Fear and greed still pushes markets around, so we can confidently say that, “no, it’s not different this time”.

The market often ignores fundamental measures of the economy, and even thrives on fear of weakness in the economy. For several years now, a majority of analysts have been telling us that the market is fundamentally over-stretched. PE ratios have rarely been higher, price-to-sales ratios are abnormally high, and so on, but the market is not listening. That is what happens during bull markets, they climb a rational wall of worry, and that is what seems to be happening now.

GDP in Q4 of 2016 was 1.9%, while the Atlanta Federal Reserve GDPNow model is predicting only 0.9% GDP growth in Q1 2017 (chart below).

That kind of number is worrying, since a 0.9% growth rate would tie the fourth quarter of 2015 as the weakest growth rate since the 1.2% decline registered in the first quarter of 2014, but the market is having none of it; the S&P 500 had a positive week overall. There is a possible fundamental rationalization for this, however, since GDP figures are “lumpy” (chart below), and Q1 GDP figures are usually lower than Q4 numbers. That 1.2% decline registered in Q1 of 2014 followed a strong 4.0% growth rate in the fourth quarter of 2013 and it was consistent with the finding that first quarter economic activity often slows from the fourth quarter.

The explanation for this quarter’s downward revision is a slowdown in consumer spending, and a decline in government spending, but things would have been even weaker if not for the increase in business investment. The latter, in our view, is significant since business spending is what has been missing throughout this “recovery”, and it is spending by businesses that will bring increased economic activity in the future, along with higher stock prices. In other words, maybe there is a fundamental reason for the present bull market.


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The counter trend sentiment patterns can warn of tops in the market, but they don’t have to be major tops. The chart below shows how major tops tend to occur when bull sentiment is higher than 50%, and bear sentiment is lower than 30%, which at the moment is not the case (chart below).

The put-to-call ratio (chart below) seems to be forming a down-spike which signals a local top 80% of the time.

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The VIX chart below, continues to carve out higher highs and higher lows, which is a pattern consistent with a correction in the S&P 500.

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Gold held relatively steady this week. Despite all the uncertainty that has been swirling around, gold has not broken above the $1260 resistance. We continue to point out that gold has yet to signal a new bull market. Gold is driven by the really big markets; treasury rates, the dollar, the USD/JPY FOREX ratio, and inflation. None of these markets have signaled a bull market in gold at this point, although this could happen in the future.

The chart below shows the long-term correlation between the dollar and the gold price. As we have pointed out before, the 1998–2000 time-frame displayed a very similar trading pattern to what we see today. If this pattern stays viable, then gold will fall further, perhaps to the $1000 level, and the dollar will rally to 105 or above before we get a turn-around in both.

The dollar and rates continue to trade within their Fibonacci retrace lines, and gold has been stopped by the $1260 resistance at the 50% retrace of the August to December decline. The bias for rates and the dollar continues to be upward, in our estimation
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The USD/JPY ratio has displayed more weakness than we had expected, but it now looks set to start a recovery with the stochastics in oversold territory (chart below).

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Silver has demonstrated considerable strength over the last three weeks, but we are not convinced that the strength will last. The commitment of futures traders shows that large speculators (who are momentum players and, therefore, maximally long at the top) have increased their long positions to 84%, while the commercial traders (the expert swap dealers and producers who know the market best) are 76% short. Price can be carried higher by momentum, but the long side of this trade is crowded which puts a cap on it (charts below).

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