Bullish Behavior Has Left The Market

While volatility can produce a bounce, it is no sign of strength. History suggests that patient investors will be presented with better opportunities in the days/weeks/months ahead.

Key Takeaway: Equity market trends have rolled over, leaving our checklist devoid of any sign of bull market behavior and putting further pressure on the weight of the evidence.

Before rolling over this past week, the 200-day average for the S&P 500 had risen continuously since June 2023. At 460 days in a row, it was the 6^th longest uninterrupted stretch of strength in the past 35 years. While there is no meaningful difference in the performance of the S&P 500 based on whether the index is above or below the 200-day average, the direction of the 200-day average matters. A lot. All the net gains in the S&P 500 since 1990 have come when the 200-day average has been rising.

Put another way, the 200-day average has been falling roughly one-quarter of the time in the past 35 years and when that has been the case, the index has not made any upside progress. But it has brought plenty of volatility and stress for investors. Daily market swings (in both directions) tend to be larger when the equity markets are in downtrends. Stepping to the sidelines in this environment is not about the risk of missing the best days in the market, its about the benefit of missing both the best days and the worst days and not taking on unnecessary risk and volatility.

With the 200-day average for the S&P 500 rolling over, none of the items on our bull market behavior checklist remain positive. As we discuss below in our monthly review of the weight of the evidence, this is an environment in which patience will likely be rewarded. Fools rush in.

For the first time since March 2023 (when the S&P 500 was <4000), our Bull Behavior Composite has dropped to zero. Our data driven approach relies on the weight of the evidence. Right now we want to look past the headlines and the day-to-day market noise and wait on the evidence to improve before increasing exposure to risk.

With the trend evidence for equities deteriorating on an absolute basis and relative to bonds, the weight of the evidence has tilted even further toward risk and away from opportunity.