Despite the historical bias for December being the best-performing month for the S&P 500 going back to 1950, the market volatility certainly hasn’t let up in December 2018. As a matter of fact, the NYSE Bullish Percent, which is our guide to risk levels in the U.S, equity markets, reversed back into a column of O’s earlier this month and has continued to move lower, down to 22% yesterday. The columns of X’s head north and show demand in control, and the columns of O’s head south and show supply in control. Prices are rising when demand is in control and falling when supply is in control. The second reversal to O’s isn’t too surprising, especially given the fact that historically, the initial reversal up from 30% does not tend to be the last. Indeed the indicator hit 30%, reversed up again to 38% as you see here on this chart dated November 21st, and now has reversed back into O’s and fallen to 22%. When we have looked back at this important indicator over the past 63 years, it has produced a couple of reversals up and down before finally bottoming … every time. See the chart below.
The 30% and below level is looked at as the “green zone” on the NYSE Bullish Percent, and we have historically seen some of the best buying opportunities come from below the 30% level; however, trips to these levels are often uncomfortable. This one certainly has been uncomfortable. One way to quantify the “uncomfortable” nature of the markets while the BPNYSE is at or below 30% is simply by looking at the standard deviation (or volatility) of the market. Current volatility is at 27.06, whereas levels in 2017 hardly got above 10 or 11 on the VIX scale.
This is one way to quantify what we have all been feeling over the past couple months in the market. What this also suggests is that we are not likely to see the volatility in the market go away overnight, but we will continue to watch this indicator specifically over the coming days, weeks, and months. A reversal back up from here would be a very positive sign and would give investors the ball. Historically, great returns have occurred from this level.
One indicator we look at to measure the overbought/oversold state of the market would be the NYSE High Low Index, which is a 10-day moving average of those stocks in the NYSE that are making new highs relative to those that are making new lows. This reading most recently crossed back below the 10% level, which is typically considered the threshold where we would begin to look for a reversal back up. If we take a look at the daily calculation used in the 10-day moving average, we find that each of the four trading days this week are actually in the 30 lowest daily readings we have seen in the history of the indicator. The other days on this list were found close to or at market bottoms around 2008, 2009, 2011, 2015, and 2016. If we look at the average return of the S&P 500 one year out from the calculations depicted on the table below, we get an average return of 37.65%. Even if we take out the forward returns from 2008 and 2009, we are still left with an average return of 18.55%. While we cannot know with certainty whether we are currently at or near a market bottom, we do know that such washed-out levels of the HILO indicator have historically preceded periods of positive market returns.
We are as ready as you are for this uncomfortable market correction to be over and look forward to the good times that we know could be ahead. Thank you as always for your trust and confidence in us. Please let us know if you have questions or concerns.
