Submitted by Salil Mehta of Statistical Ideas
Blindly Dancing At A Top
If it's too good to be true, then it probably is! We've seen this show before and admonished about it beforehand (here, here). In the 25 trading days since February 11 (when the S&P closed at 1829), the market surged at an average daily gain of 0.5%. The S&P fell <-0.5% in just 3 of those 25 days, netting -3% total among those days. While the S&P rose >0.5% in 10 of those 25 days, netting a whopping 13% total. The remaining 12 trading days contributed just 0.1% daily to the post-February 11 surge. And it's reasonable to state that the market was due for a bounce-back of this nature, after the damage caused earlier in 2016. The question of course remains: where do we go from here? Our probability analysis of market patterns forecasts that we are essentially near the top, and the longer we lurch forward at this point, the more grisly an ensuing crash.
As a quirky statistical coincidence, the market crash in August (here, here) is at the exact midpoint between today and the first trading day of 2015! And the behavior of markets now don't statistically resemble anything of grave consequence, prior to the August crash. We can see in the chart above that the 1st decile S&P levels today are the same as only 6th decile (S&P"6") price levels of early 2015. So below average and certainly nothing riveting; and clearly nothing to heavily wager on.
However ignoring the fact that the S&P is reasonably below the all-time high from early last year, the complacency/euphoria signals that we have today is the same as what we have had at extreme market tops in the past (see the blood colored data on the chart and labeled S&P1, for 1st decile). What this suggests is that in our debilitated high-risk regime, there is now only modest upward runway for the markets to run (and wilder choppiness regardless which sometimes may assuredly question your judgment). But eventually the music stops and the drunkards get bruised stumbling for the exits. The gravitational weight of excessive frothiness will came back to roost.
We prefer stability in the markets here. But if the market momentum continues to bounce higher through the month, then probabilistically we will see another fierce crash that is guaranteed to ensue.