A Strong Bull Quiet market type! Everything is going to be fine. That anxiety about a recession this year seems like so much senseless worry now. And yet . . . and yet . . . does the current market type mean we are out of the economic woods? Let’s start with the data and revisit that question later in the article.
Part I: The World Market Model
Van’s World Market Model evolved from Dr. Ken Long’s market model, which itself comes from one way that Morningstar looks at market performance by segment. Van adapted his System Quality Number for measuring market performance and applied a variant he called the Market SQN score.
The score for each of the ETFs represented in the model gives an indication of trend and volatility. Green means a positive trend and lower volatility. As we look at the table below, based on the July 31st close, we see more green than we have seen in some time.
- The US equity market has very strong large-cap segments. Everything else is positive but on the weak side. The headlines don’t capture how mid-caps and small-cap companies are performing right now.
- The rest of the Americas’ markets remain mostly green.
- Europe and Africa markets are positive with the exception of Austria. Greece and Poland have very strong scores for July.
- US sectors have mixed performance numbers. Homebuilders and Technology are particularly strong. Yellow is the dominant color in the sectors with only a few negative scores. Volatility has a very low score which, given the market type, is not surprising.
- The USD is weakly negative, so that makes most of the currency ETFs look good and green. The British Pound is now the strongest currency.
- The Asia Pacific country market scores range from mildly negative to strong. India has a very strong score but, unlike last month, there’s no severe weakness in any of the countries now.
Commodities continue to have varied performance. There’s strength in the scores for gold, silver, water, and agriculture.
The two real estate ETFs have scores that are both near zero.
Longer term Treasury Bonds remain negative while the shorter term issues are mildly positive. Keep in mind the Market SQN score uses a 100-day period and 100 trading days back was early March. Rates then were falling, they bottomed in May, and have been rising since. If that trend up continues to next month, the bond ETFs will likely have negative scores across the board again.
In the Top 15 List, Tech and growth symbols are themes again. The Top 15 List has very strong scores with even the fifteenth ETF scoring above 2 for the end of July.
Volatility issues are four of the five weakest symbols on the Bottom 15 List. The significant showing of Guggenheim symbols seems a little strange and may be a data issue.
The bulge in the database shifted north with more than a third of the ETFs reaching bullish categories and half sitting in sideways. Last month, more than half of the ETFs were bearish while this month only 14% are in the bottom two categories.
- Very Bullish: 11%
- Bullish: 26%
- Sideways: 50%
- Bearish: 11%
- Very Bearish: 3%
Part II: The Big Picture
Here are several big picture elements that have made the news in recent weeks:
- The consensus seems to have become that we are getting a soft landing—that the recession everyone has been expecting this year has been nullified by the strong employment numbers and other factors.
- The Dow Transportation Index has been in a strong bull mode for the last two months. From a macro perspective, a healthy transportation industry is healthy for a growing economy.
- According to Factset, about 80% of the companies reporting so far have beaten expectations for the second quarter.
- The residential real estate market continues to see declining sales on prices that are steady and rising in some parts of the country, while easing in other parts.
Part III: The Current Stock Market Type is Strong Bull Quiet
The market type direction for three of the four periods we monitor is now Bullish.
200 days – Bull (Sideways for the last four months)
100 days – Strong Bull (Bull last month)
50 days – Strong Bull (Sideways in six of the last seven months)
25 days – Bull (Strong Bull last month)
The market has been trending strongly since late last year and very smoothly since March.
The Market SQN chart shows the score now solidly in Strong Bull now.
And the volatility decreased in July to quiet mode.
As for the major indexes, the NASDAQ leads with a 50% gain to date in 2023. Do you have exposure to large-cap tech and are benefiting from that move? For being a little more than halfway through the year, the rest of the indexes are doing well also.
Part IV: Van’s Four-Star Inflation-Deflation Model
The model went from mildly deflationary in May to mildly inflationary in June to solidly inflationary in July.
Commodities are the only model input that had a deflationary score in July. Everything else is signaling inflation – and strongly so.
Part V: Tracking the Dollar
The USD Index closed below its 50-day MA while the 200-day MA has now started declining. In July, USD made a new lower low for the year. Is the sideways range widening to the lower side or is the decline continuing? How does the Dollar value match up with the continued increase in interest rates? These are all pieces to the big picture puzzle.
Conclusion
With a Strong Bull Quiet market type, several questions might come to mind:
1) What should traders be doing right now?
In addition to doing your Self-work, you want to be trading your Bull Quiet trading systems.
2) What do Bull Quiet systems look like?
Look at the recent months’ bars on this chart for a moment.
How would you want to trade those bars? First, you want to be long. Second, you would want to stay long so a medium/wide exit rule would be useful for this purpose. Buy and hold as a strategy really does work in this market type. You can complicate trading greatly but you don’t have to.
3) What if this market type ends?
That’s a silly question. Of course it will end. More relevant questions would be:
- How long will this market type last?
The quick answer: We don’t know. We don’t have that data. We do know that the Strong Bull Quiet market type made up 8.64% of the trading days in an historical market sample. Further, the Strong Bull Normal market type made up another 8% of the trading days in that sample. In an average market year, that would translate into 41 trading days for those two market types. Those figures can make you rich the next time the market has an average year.
- What’s likely the next market type to follow this one?
Again, we don’t know. But we do have some historical probabilities, even if they are not highly informative. In our historical sample, a Strong Bull Quiet market type shifted next to Strong Bull Normal 38% of the time. 25% of the time, it shifted to a Bull Quiet market type. The other 37% of the time, it shifted to some other market type.
- What should you do next?
You should trade the system(s) that fit the next market type.
4) What if a recession starts?
The economic cycle and market behavior correlate weakly sometimes and strongly at others though never at one. Sometimes, they are totally uncorrelated. Regardless, you trade the market, not the GDP.
If you want to factor in some economic scenario planning into your big picture, you can consider this chart.
Source – https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
The blue line represents the Fed Funds rate and the gray shaded areas represent official recessions. Every large increase in interest rates has been followed by a recession within two years. A casual observer might assess the current rise in rates as “large” relative to the others in the last 60-70 years. A likely big shift in the economy and a potential big shift in the market direction does not have to surprise anyone later this year or in 2024—you can expect it. You can even prepare for it.
In the meantime, however, trade the market type we have today and keep your eye on the big picture down the road.
P.S. We’d like to acknowledge a piece of software used in the production of Van’s World Market Model and the Market SQN charts. The Excel plugin, called XLQ, essentially eliminates the work of importing price data from multiple sources and calculating technical indicators. There’s a free trial of up to 45 days and Van Tharp Institute clients get a nice discount by using the discount code “IITM” in the checkout process. VTI receives no financial benefit from anyone purchasing XLQ. We simply mention the software to you because XLQ has proven to be a highly useful and dependable tool for us – and for many of our clients – over many years. We are grateful.
You can find more information at https://qmatix.com/index.htm