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March 31, 2016

The US Stock Market’s Acid Test

If the bear-market label doesn’t apply to the US stock market, the evidence will be forthcoming in weeks ahead. But that’s a high bar at the moment. The rally in recent weeks has recovered most of the year-to-date losses, but a bigger test awaits: regaining the strategic momentum that’s been MIA since last summer. The odds for success don’t look encouraging, leaving tactically minded investors with a simple question: Do you feel lucky?

The case for caution, by contrast, looks well-founded. Consider the S&P 500’s history over the past year, which can be summed up as follows: lesser highs and lows. The details for the bearish case include:
a) The year-over-year rate of change for the S&P 500 remains negative
b) The 50-day moving average remains well below its 200-day counterpart
c) The recent rally has, at the moment, run out of gas and the latest peak has fallen short of previous peaks

Negative momentum, in other words, continues to weigh on the US stock market. The implication: the recent pop falls under the heading of a bear-market rally.
Given this backdrop, it’s no surprise that an econometric measure of regime change—shifts from bull to bear markets and vice versa—is still aligned with a dark outlook. The bear-market label continues to apply to the S&P 500, according to analysis of price data via a Hidden Markov model (HMM). This quantitative metric turned negative several months back and the warning still stands, based on market data through Mar. 28 close.  

The dark art of divining market trends offers no guarantees, of course, and so the standard caveats apply. On that note, what might negate the bear-market analysis? A robust run of economic reports would probably suffice. The March update on nonfarm payrolls that’s due Friday, Apr. 1 offers an opportunity for bullish deliverance. Econoday.com’s consensus forecast calls for a respectable gain of 210,000 for the headline number—moderately below February’s advance but a decent rise nonetheless.
On that note, one might ask why the stock market isn’t roaring higher if the labor market is expanding at a healthy pace? Perhaps equities aren’t accurately pricing in the economic news, which implies that the bear-market profile of late will soon fade.
Meantime, the market’s posture remains shaky. Yes, a bullish reversal is coming… one day. But the price data at the moment suggests that a new bull market (or the revival of the old one) isn’t on the immediate horizon.

About the Author - James Picerno is a veteran financial journalist since the early 1990s at Bloomberg, Dow Jones, etc. before becoming an independent writer/analyst/consultant in 2008. James is also the author of Dynamic Asset Allocation (Bloomberg Financial, 2010) and he writes at The Capital Speculator(Author Archive here)
The Dolce Whey at Onnit.com!

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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