Bullish Streaks for Some, but Not for All

The following chart shows the rolling five-week changes in search activity (z-score) for common small investor topics.  Most topics have seen decreased levels of search activity including cryptocurrencies despite the recent NFT  boom.  

Investors are witnessing bullish cycles across many risk assets coming to an end. We review a simple long/short positioning strategy using bullish/bearish breakouts from 50-trading day ranges. The average length of these cycles across risk assets has quickly dropped to 92 trading days.  As a reminder,  bullish cycles typically come to an end after passing the two standard deviation mark (approximately 163 days).

Since the 1970s the S&P 500 has typically experienced sideways movement after risk assets produced a bullish cycle lasting 180 trading days. So far S&P 500 returns have consistently trended upwards thus far despite the historical precedent. It remains to be seen if this trend will continue like it did in 1986 when returns exceeded 10% over the following eight-plus months or level out like it has in every other period before/after 1986. 

The S&P 500 has been engaged in a bullish cycle (i.e. breakout) that has run for a whopping 325 trading days and recently surpassed the bull run of 1994 lasting 322 trading days. The current cycle is second only to the bull run starting in 1955, which lasted 492 trading days.  The return during this latest cycle at 53% has only two past cycles for comparison in 1955 and 1983 with returns of 86% and 51%, respectively.

Speaking of record breaking runs, the current (everything) rally across various risk and safe assets seen the average Sharpe ratio running above 1-to-1 for 274 trading days. The average Sharpe ratio across these assets is a lofty 1.88!

The convergence in Sharpe ratios signals incredibly low dispersion. The few times dispersion has been this low was right before the Fed interest rate hikes in 2004 and 2015. Are Sharpe ratios primed for a rate hike, or more likely a taper by the Fed?

Additionally, commodities have had a notable bull run of their own since breaking out on June 2, 2020.  Spot prices produced returns of 63% over the past 317 trading days. The recent commodity rally spurred large conversations about the possibility of a commodity supercycle, although those talks have fairly subsided as the commodity rally has become weaker and more disjointed compared to a few months prior.

In contrast to commodities and equities, US high yield corporates have seen their extended bull run since late May 2020 come to an end. The bullish breakout from late May 2020 ended on August 4, 2021.

US 10-year TIPS breakevens recent bearish cycle continues into its 54th consecutive trading day. The recent bull cycle ended on June 16, 2021 after sizable 248 trading days.

Lastly, US 10-year note yields continue their own bullish run for the 61st consecutive trading day at -23.6 basis points.

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