The Markov Argument Against A Nasdaq Bull Market

In the traditional definition of a bull market, the Nasdaq moved into that space last week after it had risen 20% off its lows since mid-June (it is still down around 16.6% for the year). But some metrics suggest that the factors behind the Nasdaq slipping since the beginning of the year have not changed - particularly the signals from the Markov process.

In the chart below, every time over the past year that Markov State 2 crosses above Markov State 1, the Nasdaq index registers either a slight gain or a loss. Over those same time periods of the state change, note the chart that is showing negative rolling returns. Since the beginning of this year, State 2 crosses State 1 and has remained there. In other words, until there is another cross (this time State 1 crossing above State 2), Markov argues that there remains price pressure on the Nasdaq. That could be in part because volatility remains high - often an indicator of downward price movement.

Finally, with the RSI at 69 last Friday (Aug. 12) - it is only one notch below the overbought "70" RSI signal.