The S&P 500 Back in the Upside Down?

The S&P 500 (Index: SPX) appears to have returned to the upside-down.

That’s the situation that exists when the behavior of stock prices acts contrary to the usual rules that apply to them. In terms of the dividend futures-based model we use to project the future for the S&P 500, we see that change in the value of m, the amplification factor in the model, when it changes from a positive to a negative value.

When that happens, it’s safe to say the market has undergone a regime change, which is a possibility we first raised last week. This week, we’ve accumulated enough data to take a stab at an initial estimate of the new value for m. The latest update to the alternative futures chart shows that change in regime as if it began on 11 May 2021.

In setting the start date for the new market regime, we’re using our previous redzone forecast range as a statistical hypothesis test, which in truth, is really what it is. Extending it slightly forward, we find the level of stock prices has dropped definitively outside its range as of 11 May 2021, which means at least one of the assumptions behind the redzone forecast no longer applies.

Using the newly added data accumulated in the past week allows us to initially estimate a new value of -5 for the amplification factor. At the same time, the data suggests investors have shifted their forward looking focus to 2021-Q4 in setting current day stock prices. Combined with the regime change we just described, these Lévy flight shift would help explain the market’s recent volatility.

It’s very early days for determining these values. We’ll continue testing them behind the scenes.

In the 11+ years since we first developed the dividend futures-based model, we’ve only seen the S&P 500 go into the upside-down once before, when a combination of changes in the Federal Reserve’s monetary policies and some extreme speculation on the part of the “Nasdaq Whale” sent it there during the summer of 2020, ending only when the Nasdaq whale exited their speculative trades in September 2020.

At this time, we’re not aware of any similar speculative activity in the markets. Then again, it wasn’t until weeks after the Nasdaq whale started trading that their impact on the markets was traced to their trades. That’s why we keep paying attention to market-moving news as it comes across the wires. Speaking of which, here are the headlines we flagged during the trading week ending on Friday, 21 May 2021.

Monday, 17 May 2021

• Signs and portents for the U.S. economy:

• Oil climbs 1% on economic recovery hopes despite fresh Asian restrictions
• Households including most U.S. children to get monthly stimulus payment

Fed minions not worrying about inflation, see 7% growth:

• Fed’s Clarida: U.S. growth could hit 7% this year

Bigger inflation developing all over:

• Japan April wholesale prices jump on rising material costs
• Inflation re-cycling: Chinese exporters pass higher costs on to customers around the world

Global shortages developing in China:

• China’s factory output slows as bottlenecks crimp production

Wall St ends lower, pulled down by tech stocks

Tuesday, 18 May 2021

• Signs and portents for the U.S. economy:

• Oil settles lower on reports of potential Iran nuclear deal
• Surging lumber prices weigh on U.S. homebuilding
• Service sector activity surged at record pace in May, NY Fed survey finds

Fed minions focus on jobs comes at cost of inflation:

• Column: Fed focus on jobs implies significant inflation overshoot

Bigger trouble developing in Eurozone, Japan:

• Euro zone recession confirmed at start of 2021

• Supply bottlenecks could delay German recovery, institute warns

Japan’s economy slumps back into decline as COVID-19 hits spending

ECB minions thinking about keeping stimulus going:

• ECB’s Lagarde committed to further support for euro zone economy

• ECB’s Villeroy plays down inflation risks, says ECB policy should stay very accommodative
• Germany’s top court rejects complaint against ECB’s bond buying scheme

Euro zone inadvertently supported zombie firms, ECB finds

Wall Street closes lower on weak telecom stocks despite strong retail earnings

Wednesday, 19 May 2021

• Signs and portents for the U.S. economy:

• Oil prices dive $2 on fears of Asian pandemic, possible U.S. rate hikes
• U.S. mortgage applications tick up, purchase applications at 3-month low – MBA

Fed minions becoming concerned with inflation to start talking taper of bond buys; other minions try throwing cold water:

• FOMC minutes reveal more talk of taper at April meeting

• Ahead of jobs miss, some Fed officials edged towards ‘taper’ debate
• Fed officials: Crypto rout not a systemic concern

Fed’s Bostic says not yet at bar for any QE taper

Fed’s Bullard: Expectations of 1 million jobs a month “hyped up,” half a million more realistic

Bigger inflation developing all over:

• UK inflation more than doubles as post-lockdown price climb begins

• UK house prices jump 10%, fastest rate since 2007 – ONS

Canadian home price gains accelerate in April from prior month -Teranet

Euro zone inflation accelerates in April on energy, services

Bigger stimulus developing in Japan:

• BOJ’s Kuroda signals readiness to extend pandemic-aid scheme

ECB minions thinking about keeping stimulus going, see problems from keeping stimulus going:

• ECB’s de Guindos says credit still cheap, cautious on stimulus withdrawal
• Property bubbles, corporate debt among Europe’s top risks: ECB

Wall Street closes lower after Fed minutes, crypto fall

Thursday, 20 May 2021

• Signs and portents for the U.S. economy:

• U.S. weekly jobless claims drop further; mid-Atlantic factory activity slows
• Oil falls 2% on possible return of Iranian supply

Fed minions wants to start tapering stimulus bond buys:

• Fed’s Kaplan repeats call for opening QE taper debate

Bigger inflation developing all over:

• UK factories boom but bottlenecks pushing up prices – CBI
• China’s industrial commodities slide after Beijing warns of market crackdown

S&P 500 gains 1% as tech shares rally, Treasury yields fall

Friday, 21 May 2021

• Signs and portents for the U.S. economy:

• Analysis-How the post-pandemic labor crunch is curbing U.S. manufacturing
• U.S. existing home sales extend decline; house prices race to record high
• U.S. manufacturing accelerates; tight supply pushes home sales to 10-month low
• Oil jumps on weather concerns in Gulf of Mexico

Fed minions out to lower jobs expectations, want to talk about slowing stimulus bond buys:

• Fed officials, new data, start lowering expectations for U.S. jobs in May
• Fed’s Harker says important to talk about tapering sooner rather than later

Bigger inflation developing all over:

• No let-up for inflation that is haunting emerging markets
• Global inflation-linked bonds draw massive inflows in week to May 19 -Lipper

ECB minions addicted to doling out stimulus:

• ECB’s Lagarde says too early to discuss life after emergency support
• Euro zone business growth hits three-year high but ECB cautious

U.S. stocks end mixed as Dow recovers on strong economic data

What was positive and negative about the past week’s markets and economics news? Be sure to check out Barry Ritholtz’ succinct summary!