I have to admit, calling the market in the short-term is about as much an art as it is a science, but not the long-term. That is much more a science.
On February 1st, 3 1/2 months ago, the components of our Asset Allocation Model moved to P4, M1 and V1. And on that day, we wrote about how it was time for the stock market to take a pause as the economy caught up. Fast forwarding to today, based on the scare of the last few weeks, the Psychology Composite has improved to P4, getting us back to exactly the same levels on our Asset Allocation Model as we saw in February. If you remember, it has been flipping across that P4/P5 threshold for the last few weeks, but it is fairly deep into the P4 zone now and seems to be moving in the "right" direction. It has seemed like an eternity since February as we've been giving you reports along the way expecting short-term caution.
Of course, Mr. Market tried to hide the correction as the market indices moved up after our February 1st report, but internally, the correction was very much in progress. Now today, you can see in the chart below that the S&P 500 has moved back to that February 1st level, but that is not really telling the same story as we're seeing internally in the market. Today, the often quoted percentage of stocks in the combined S&P 500 and S&P 400 above their 50-day moving average is now 27% (while it was close to 90% in early February following January's strong rally).
We hypothesized on Monday that the risk from the top of the recent rally is about 9% or so, but that is based on chart support, etc. Yet, like I said above, painting the short-term picture is as much an art as it is a science. We see so many evolving positive factors today, but the one big bug-a-boo is the upcoming trend of national politics.
But today, our science tells us that the short-term is about (not quite, but about) as risky as it is rewarding. So for now, we'll stick with our guesstimate that the US stock market has a little more downside risk here, and the strong upside might have to wait on a little more insight concerning the US election. I don't think the US stock market wants to see any more political gridlock, but instead, it's waiting on some combination of politicians that will encourage productivity enhancers and diminish productivity destroyers.
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