Data &
Technology
Research
Reports
Report Solutions
Reports Library
Actionable
Strategies
Free
Resources
Simple Backtest Calculator
Simple Seasonality Calculator
The Kelly Criterion Calculator
Sentiment Geo Map
Public Research Reports
Free Webinar
Pricing
Company
About
Meet Our Team
In the News
Testimonials
Client Success Stories
Contact
Log inLoginSign up
< BACK TO ALL REPORTS

Still waiting for the market environment to turn healthy

Jason Goepfert
2022-04-07
In recent weeks, buyers have came in with force, triggering thrusts in indexes, exchanges, and even the bond market. But so far, that hasn't translated to an objectively healthy market environment. That needs to change to have more confidence in a sustainable rally.

Key points:

  • It's been a struggle to see a majority of 8 key market environment factors turn healthy
  • In unhealthy environments, advances tend to be choppy and prone to failure
  • The recent thrusts need to morph into longer-term sustainable advances

The market environment is struggling to turn healthy

After the most benchmarked index in the world fell into a "10-and-10" correction, buyers stepped in with force. Breadth thrusts have been recorded in indexes, entire exchanges, and even in high-yield bonds.

And yet this is all within a post-speculative sentiment bubble and a still-struggling market environment. Even after the thrusts, the environment has not managed to turn consistently positive.

As noted in the Knowledge Base, I follow 8 basic measures of market health that anyone can monitor. There are certainly more complicated indicators and more sophisticated ways of paring the list, like machine learning or principal component analysis. This is based on brute-force testing and a whole lot of experience.

IndicatorStatus
Higher highs/lowsUnhealthy
Price > 200-day avUnhealthy
Rising 200-day avgHealthy
> 60% of stocks above 200-day Unhealthy
McClellan Summation > 0Unhealthy
McClellan Summation is risingHealthy
NYSE New Highs > New LowsHealthy
< 40% of stocks in correctionUnhealthy


As of Tuesday's close, only 3 of the factors were in healthy territory. A couple of them are flirting around their thresholds, so this can improve quickly, but it needs to be sustained.

Unhealthy environments tend to have the choppiest trading

Over the past several years, these measures have provided a good heads-up to stay out, or at least cautious, when the environment is unhealthy. It's been trying to poke above 5 but hasn't been able to hold, and the last couple of days pushed us right back down. Through testing over the past 50 years, when 5 or more factors are healthy, stocks tend to do their best.

Over the past 30 years, stocks have spent 65% of the time in a healthy environment and 35% in an unhealthy one.

Using this as a trading system would be difficult because it can jump in and out during choppy markets. But using next-day returns, the equity curve is drastically different depending on the environment. Since 1990, $10,000 grew to more than $72,000 during healthy environments and only $17,000 during unhealthy ones. Early 2018 was kind of screwy; otherwise, these figures would be stretched even further.

We're always more concerned about risk than reward, and looking at the drawdowns in the two curves, unhealthy environments saw a drawdown about 3 times greater than healthy ones.

What the research tells us...

There are strong suggestions that the interest from buyers over the past 3 weeks is the kind of activity that tends to generate even more buying interest during the next 1 to 3 months. We place a lot of weight on breadth thrusts in all their various forms, and many of them have triggered. Given the larger context, we'd like to see more environmental factors turn positive. The fact that they're not makes it riskier to add exposure.

We will be adding this Market Environment to the daily site updates at some point. We're currently involved in the most extensive tech upgrade in our history, so we've mostly put off adding anything further to the site until that's completed. The public face of the site will be updated next week, after which we're tackling the user side, which involves a complete overhaul in the architecture of the data and its presentation. At that time, we'll have the capability of adding more indicators, models, and tools in a more logical and easier-to-use way.

Sorry, you don't have access to this report

Upgrade your subscription plan to get access
Go to Dasboard
DATA &
TECHnologies
IndicatorEdge
‍
BackTestEdge
‍
Other Tools
‍
DataEdge API
RESEARCH
reports
Research Solution
‍
Reports Library
‍
actionable
Strategies
Trading Strategies
‍
Smart Stock Scanner
‍
FREE
RESOUrCES
Simple Backtest
Calculator
Simple Seasonality
Calculator
The Kelly Criterion
Calculator
Sentiment Geo Map
‍
Public Research Reports
‍
Free Webinar
COMPANY
‍
About
‍
Meet our Team
‍
In the News
‍
Testimonials
‍
Client Success Stories
Pricing
Bundle pricing
‍
Announcements
‍
FAQ
© 2024 Sundial Capital Research Inc. All rights reserved.
Setsail Marketing
TermsPrivacyAffiliate Program
Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

Testimonial Disclosure: Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.