What Happens Next After All-time Highs?

What Happens Next After All-time Highs?

This is a Guest Post by Troy Bombardia of BullMarkets.co.

After a nonstop rally, the S&P is now just within 2% of making all-time highs. This illustrates a key point when investing/trading the U.S. stock market – you want to be very selective when turning bearish. Most underperformance comes from being underinvested.

The economy’s fundamentals determine the stock market’s medium-long term outlook. Technicals determine the stock market’s short-medium term outlook. Here’s why:

  1. The stock market’s long term risk:reward is no longer bullish.
  2. The medium term direction (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
  3. The stock market’s short term is neutral

We focus on the long term and the medium term.

Long Term

While the bull market could keep going on, the long term risk:reward no longer favors bulls. Towards the end of a bull market, risk:reward is more important than the stock market’s most probable direction over the next 12+ months

Some leading indicators are showing signs of deterioration. The usual chain of events looks like this:

  1. Housing – the earliest leading indicators – starts to deteriorate. This has occurred already
  2. The labor market starts to deteriorate. Meanwhile, the U.S. stock market is in a long term topping process. We are in the early stages of this process, but the deterioration is not significant.
  3. Other economic indicators start to deteriorate. The bull market is definitely over, and a recession has started. A U.S. recession is not imminent right now

*All economic data charts are from FRED

Labor market

Initial Claims is trending sideways from a very low level while Continued Claims is trending upwards.

In the past, these 2 figures trended higher before bear markets and recessions began.

Similarly, the Unemployment Rate is trending sideways.

This is not immediately bearish for the stock market and U.S. economy, so we are merely watching out for further deterioration in the labor markets. In the past, Initial Claims and Continued Claims trended upwards for several months before economic recessions and bear markets began. (Initial Claims tends to lead the Unemployment Rate, which is more of a lagging indicator).

The problem of course is that as the economy becomes “as good as it gets”, all the risk is to the downside. And with Unemployment this low, the economy is indeed “as good as it gets”.

One indicator does suggest that the labor markets will deteriorate a little throughout the rest of 2019. The year-over-year % change in overtime hours is dropping. This is a bit of a worry, considering how late we are in this economic expansion cycle.

Here’s what happens next to the S&P when the yearly % change in overtime hours fell below -6.5%, while Unemployment was under 6% (i.e. late-cycle).

Corporate profits

While the labor market is not a favorable point for stocks in 2019, corporate profits is a favorable point. NIPA corporate profits are still trending higher.

Corporate profits tends to lead the stock market by 4-6 quarters. With corporate profits trending upwards right now, this is a bullish sign for stocks in 2019.

The conflict between corporate profits (bullish for 2019) and labor markets (mixed for 2019) illustrates the biggest problem with predicting bull market tops. It’s very easy to be a year too early when calling bull market tops. For example, many great investors and traders thought that the 1990s bull market would end with the Q3 1998 crash. It didn’t. The bull market lasted another 1.5 years until 2000.

The S&P 500’s earnings growth will probably turn negative in Q1 2019.

Here’s what happens next to the S&P when earnings growth falls below -3%, while Unemployment is under 6% (i.e. late-cycle cases)

This is something to watch out for, but no need to immediately panic. Factset also estimates that earnings growth will turn positive after Q1 2019. (Earnings growth is turning negative partially due to a tough comparison post-Trump tax cuts).

*NIPA profits tends to lead the S&P 500’s profits by 3 quarters. With NIPA profits still trending upwards, this suggests that the S&P 500’s profits will resume growing after Q1 2019 for a few more quarters.

Yield curve and recession probabilities

The New York Fed has created a Recession Probability Index by inverting the 10 year – 3 month yield curve.

Here’s what happens next to the S&P when the probability of a recession exceeds 27% according to this index.

In a worst case scenario, a bear market has started already (e.g. July 2000 scenario). In a most optimistic case scenario, the bull market still has 1.5 years left (e.g. 1998 and 2006 scenarios).

Individual states

The Philly Fed creates a state coincident index, which looks at whether individual state economies are improving or deteriorating. The Philly Fed then combines these into a 1 month and 3 month diffusion index to gauge the health of the collective U.S. economy. As you can see, the 3 month diffusion index is still quite high right now. Previous recessions and bear markets began when the Philly Fed State Coincident Index was lower.

Citigroup Economic Surprise Index

The Citigroup Economic Surprise Index continues to fall, leaving some market watchers to scratch their heads wondering how the U.S. stock market can keep going up when “the economy is bad”.

In a common misunderstanding, the Citigroup Economic Surprise Index doesn’t measure the state of the economy. It merely measures the state of economic data versus analysts’ expectations. It is entirely possible for economic data to improve yet miss analysts’ expectations if expectations are too high.

Here’s what happens next to the S&P when the Citigroup Economic Surprise Index is under -55

Interest rates

Mortgage rates are falling right now, which eases some pressure off of home loan borrowers. (Remember in 2018 how everyone was “afraid of rising interest rates”? In an interesting twist, everyone is “afraid of falling interest rates” today.)

Here’s the 5 month rate-of-change in 30 year fixed mortgages rates.

This decrease in mortgage rates is more bullish than bearish for stocks.

Conclusion: The stock market’s biggest long term problem right now is that as the economy reaches “as good as it gets” and stops improving, the long term risk is to the downside.

The end of a bull market is always very tricky to trade. The stock market can go up a lot in its final year, even if the macro economy is deteriorating (e.g. 2006-2007). That’s why it’s better to focus on long term risk:reward instead of trying to time exact tops and bottoms. Even when you think the top is in, the stock market could very well surge for 1 more year. (Just ask the people who thought that the dot-com bubble would end in 1998. It lasted another 1.5 years).

Medium Term

*For reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

The stock market’s price action demonstrates a bullish lean over the next 6-12 months.

Almost new highs

The S&P is now just -1.2% below its all-time high (on a daily CLOSE $ basis). The stock market was crashing just 4 months ago.

Here’s what happens next to the S&P when it is now within -1.5% of a 3 year high, after being more than -15% below its 3 year high sometime in the past 5 months.

The S&P faces some potential short term resistance, after which its forward returns are more bullish than usual.


The Put/Call ratio is trending down. The ratio’s 50 dma is now more than -0.08 below its 200 dma.

Is this a sign of complacency in the stock market?

Here’s what happens next to the S&P when the Put/Call Ratio’s 50 dma is more than -0.08 below its 200 dma.

Somewhat short term bearish, but is mostly bullish for stocks 3-9 months later.


In an act of perfect symmetry, the S&P’s 15 week rate-of-change has gone from less than -15% to above +15% in 15 weeks. It’s been a V-shaped recovery.

Historically, these V-shaped rallies could encounter short term resistance, but were more bullish than bearish 9-12 months later.


The S&P’s momentum is strong, with its 14 weekly RSI now above 60.

This is a positive sign for stocks. Previous bear market rallies usually did not see such strong momentum.


This week saw extremely light volume in the stock market. For example, SPY’s volume this Tuesday was more than -50% below its 200 day moving average.

Traditional technical analysis sees low volume rallies as bearish because “volume should confirm price”.

History suggests otherwise. Here’s what happens next to the S&P when SPY volume is more than -50% below its 1 year average, while the S&P’s 14 day RSI is above 65 (i.e. low volume in an overbought market)

*Data from 1993 – present

As you can see, low volume rallies are perfectly normal. Bear market rallies typically see higher volume.

Volume is also extremely low right now from a weekly perspective.

Here’s what happens next to the S&P when SPY rallies more than 20% over the past 15 weeks while SPY’s volume also falls more than -50%.

As you can see, this is normal for sharp reversals. Falling volume is neither bullish nor bearish. It just is.


Breadth is recovering as the stock market rallies. More than 70% of the S&P 500’s stocks are now above their 200 dma.


From 2004-present, this was a short term bearish sign for stocks, but was positive after that.

*Be careful when using indicators with less then 40 years of historical data. The returns are misleading simply because you don’t have enough varieties of bull markets and bear markets in the data.


There have been a lot of gaps this week. In fact, the S&P has opened higher than yesterday’s close for 9 days in a row!

Traditional technical analysis sees gaps as “bearish” because “gaps should be filled”.

From 1962 – present, such a long streak of today’s OPEN > yesterday’s CLOSE has only happened 2 other times:

I wouldn’t treat gaps as bearish for the stock market. With overnight trading becoming more and more important (e.g. more foreigners trading U.S. stocks), I wouldn’t see gaps as either bullish or bearish. Just an increasingly common fact of life.

So far, most of the S&P’s gains in 2019 have come during the day (although there has been a slight uptick in nighttime gains recently).

This stands in sharp contrast with 2018, when most of the S&P’s gains came during the night and most of the losses came during the day.

Technical indicators

The NASDAQ made a Golden Cross on Wednesday, whereby its 50 dma crossed above its 200 dma

The NASDAQ’s 9-12 month forward returns are more bullish than random after it makes a Golden Cross.


As of Thursday, XLY (consumer discretionary) and XLU (utilities – defensive) have diverged from eachother.

Historically, this kind of divergence is something that bulls should watch out for.

As of Tuesday, tech stocks have been leading the rally while small cap stocks have been lagging.

Tech leading and small caps lagging has been mostly bullish for stocks 3-12 months later, especially for the NASDAQ.

Other markets

Q1 2019 was an extremely good quarter for stocks and bonds. The S&P rallied for 3 consecutive months while the Bloomberg Barclays Corporate Bond Index also rallied for 3 months.

Historically, this is quite bullish for stocks.

Short Term

*The short term is extremely hard to predict, no matter how much conviction you think you have.


So far, it seems that the Dow is following its April seasonality.


The stock market’s short term momentum is strong, with the S&P now up 7 days in a row.

The last time the S&P rallied 7 days in a row was October 2017. As you may recall, the stock market’s momentum was extremely strong in 2017, setting many records (“record number of days without a -3% decline”, “record number of days without a 3 day consecutive decline”, etc).

Here’s what happens next to the S&P when the S&P rallies 7 days in a row, for the first time in 1 year.

While longer term forward returns are mostly random, short term forward returns are more bullish than random. Perhaps this will be enough to push the S&P to new all-time highs soon?


Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimistic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (e.g. next 6-9 months) is mostly mixed, although there is a bullish lean.
  3. In summary, 12-24 months = bearish, 12 months = neutral, 6-9 months = slightly bullish.

Goldman Sachs’ Bull/Bear Indicator demonstrates that risk:reward does favor long term bears.

This is a Guest Post by: Troy Bombardia you can follow him on Twitter at @bullmarketsco and his website is BullMarkets.co.

***All content, opinions, and commentary is by Troy Bombardia and is intended for general information and educational purposes only, NOT INVESTMENT ADVICE.