Highly Correlated Markets; Non-Recessionary Bear Markets

This is an abridged version of our Daily Report.

Highly correlated

Over the past 50 days, markets have been closely following each other. The moves in the S&P 500 have been tight with commodities, yields, and overseas stocks.

This has usually happened during times of stress, and long-term returns in stocks were excellent following similar conditions, as it often occurred near inflection points. One year later, the S&P showed a positive return each time. Commodities and world stocks also tended to rally, though to a lesser degree.

Non-recessionary bear markets

The path in the S&P 500 since the September peak has a high correlation with bear markets that occurred during times when there was no recession in the next year. Looking at all non-recessionary bear markets, we've closely followed the median path, as well as many individual precedents.

It has not closely followed the path of bear markets when there was a recession.

Loving financials

The 10-day Optimism Index for XLF is above 75 while the fund itself is below its 200-day average. According to the Backtest Engine, there have been 13 days in its history when this happened and over the next week it managed to add to its gains only 3 times.

Ebbing momentum

The McClellan Oscillator is nearing the end of a streak of more than two weeks above 50, an extraordinary display of momentum. When occurring while the S&P 500 is below its 200-day average, the ends of these streaks led to mostly in-line returns over the short- to medium-term.