The stock market has been very volatile lately, swinging up and down more than 1% on many days. During times of high intraday volatility, it’s best to ignore the short term and focus on the bigger picture.

Let’s determine the stock market’s most probable direction by objectively quantifying technical analysis. For reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

*Probability ≠ certainty.

Active managers are bearish on stocks

NAAIM measures the average exposure to U.S. stocks by active investment managers. This is a contrarian signal because most active investment managers (like most hedge funds) underperform buy and hold. They get very greedy after stocks go up and get bearish after stocks go down.

NAAIM is very low right now, below 36%

Here’s what happened next to the S&P 500 (historically) when NAAim fell below 36%

*Data from 2006 – present

As you can see, the stock market tends to go up over the next 2-3 months, even during 2008. Afterwards, forward returns start to deteriorate.

Put/Call remains elevated

The Total Put/Call Ratio (a sentiment indicator) remains elevated. Its 30 day moving average is now above 1.1

Here’s what happened next to the S&P 500 when the Put/Call Ratio’s 30 day moving average was above 1.1

*Data from 1996 – present

As you can see, the stock market tends to go up over the next 1-3 months.

Emerging markets’ very long downtrend

Despite the recent bounce, emerging markets remain in a very long downtrend

From 1996 – present, there have only been 3 cases in which EEM (emerging markets ETF) was below its 200 day moving average for at least 148 consecutive days:

1. November 15, 2018
2. January 21, 2009
3. November 10, 2000

Here are those signal dates.

Here’s the interesting point. There was 1 long term bearish date (2000) and 1 long term bullish date (2009). Even in the bearish case (2000), EEM fell less than the S&P 500 during the next bear market. Perhaps this is becaues EEM already fell so much, that when the S&P’s bear market finally came, EEM didn’t have as much room left to fall.

Anyways, food for thought.

Conclusion

Our discretionary technical outlook remains the same:

1. The current bull market will peak sometime in Q2 2019.
2. The medium term remains bullish (i.e. approximately next half year).
3. The short-medium term is mostly a 50-50 bet, although there is a slight bearish lean to it.

Focus on the medium term and long term. The short term is usually just noise.