03/25/2014 The Brick Wall

So the market is suddenly bouncing off what seems like a brick wall.

Just what the heck is it hitting?

I’ve noted this a few times before, that the market was approaching its long term median regression line.

Well – it’s hit it.

In the past I’ve shown the regression line for the entire series.  Tonight I’d like to add the regression channels as they have developed over the last 64 years:

I know – it’s a busy chart.

The middle line in red is the median regression line.  Today the S&P closed at1865.62.  The 64 year median logarithmic regression is 1867.08.

A bunch of quants are bouncing off of it because the median regression normally serves as a secular boundary.  The S&P will spend a few decades below that line, then a few decades above that line, and now we’re in the 5^th year below that line again.

Typically we should bounce between the red Regression line and the Dn2 line at the bottom, weaving around the Dn1 line.

Dn1 is 1 standard deviation below the median regression – today at 1373.13.

Dn2 is 2 standard deviations below the median regression – today at 1009.85.

In other words, during a secular bear the market should average around that (rising) 1373.13 line.

If you’re rolling your eyes at that thought, you’re in good company.  I am too.  QE has thrown us wildly off track for a natural market, and so it’s anyone’s guess where it will be.  Those quants that keep selling off at the Regression line are acting as if this were a normal market.

Although I don’t think the market will skyrocket from here, I doubt it will crash.  More likely (and this is MY guess), the market’s 5 year trajectory will taper off a bit.  Instead of gaining 30% this year, we’ll probably end the year a little above 2000 on the S&P.

I expect us to ride that Regression line for a while, rather than crash off of it.

Since I don’t time, none of this affects my own trading.  But it’s always interesting to watch the quants try to game the system…

Tim