This Momentum Signal Triggered Before Recent Crashes

An increasing number of industries are struggling.

The number of sub-industry groups with a positive 1-year rolling return crossed below 50% this week.?The downward shift in momentum occurred after more than 80% of the groups had positive returns as recently as February.

When we assess the outlook for stocks after the number of sub-industry groups with a positive 1-year rolling return cross below 50% with a reset condition of 80%, we see that forward returns were poor, especially over the next 2-3 months.

Another worry? It triggered right before the last two 10% drawdowns in the S&P.

What Research Tells Us

• This study generated a signal 20 other times over the past 65 years.
• The 2 & 3-month windows show negative returns with z-scores approaching significance.
• In 19 out of 20 instances, the S&P 500 closed below the signal date close in the next few months
• Industrials, financials, and consumer discretionary stocks showed among the worst returns.

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Bonds' seasonal tailwind

The 45-month cycle for T-bonds will turn favorable on May 1st and will remain so for 22 months.?The annual seasonal trend will turn up at the close on May 12th and remains favorable through September 1st.?The bond market tends to perform well when both of these seasonal factors are favorable.

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Severe selling in Shanghai

Stocks in the Shanghai Composite are heavily oversold, spiking a Panic Breadth Composite.?This week, the breadth indicator jumped to the 13th-highest reading in the past 20 years.?Chinese stocks don't respond consistently to oversold readings, but it will help if investors buy the dip this week.

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