December 20, 2018: fundamental outlook for stocks


*Go to the blog for my latest market outlook. Members can go here to see our trading model’s latest updates and how we’re trading the U.S. stock market right now based on these models.
The economy and stock market move in the same direction in the long term. Hence, leading economic indicators are also leading indicators for the stock market.

Thoughts

*We’re seeing mixed readings in the leading economic indicators right now. Some are still bullish while others are turning bearish. This is typically what happens towards the end of bull markets, when leading indicators start to deteriorate one at a time.

  1. Housing Starts is trending sideways. Not a long term concern for the stock market yet, but will be in 2019 if Housing Starts begin to trend downwards.
  2. Building Permits is trending downwards. Not a long term concern for the stock market yet, but will be in 2019 if this continues.
  3. Initial Claims is trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in Q1 2019 if Initial Claims starts to trend upwards significantly.
  4. Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but watch out if this starts to trend upwards.

1 am: Housing Starts is trending sideways. Not a long term concern for the stock market yet, but will be in 2019 if Housing Starts begin to trend downwards.
The latest reading for Housing Starts went up from its previous reading (1217k to 1256k). However, the key point is that Housing Starts are trending sideways.
This is not yet a long term bearish factor for the stock market, but will be in 2019 if housing starts begin to trend downwards (which hasn’t happened yet).

The economy and stock market move in the same direction over the long run. Housing is a leading indicator for the U.S. economy, which makes it a long term leading indicator for the stock market.

This chart demonstrates how Housing Starts leads the S&P 500.

1 am: Building Permits is trending sideways/downwards. Not a long term concern for the stock market yet, but will be in 2019 if this continues.
The latest reading for Building Permits went up from its previous reading (1265k to 1328k). However, the key point is that Building Permits are starting to trend sideways/downwards.
This is not yet a long term bearish factor for the stock market, but will be in 2019 if this continues.

The economy and stock market move in the same direction over the long run. Housing is a leading indicator for the U.S. economy, which makes it a long term leading indicator for the stock market.

This chart demonstrates how Building Permits leads the S&P 500.

Initial Claims is trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in Q1 2019 if Initial Claims starts to trend upwards significantly.
Yesterday’s reading for Initial Claims went up from its previous reading (from 206k to 214k). While Initial Claims have mostly been trending lower throughout 2018, they are mostly trending sideways now. Perhaps Initial Claims will start to significantly trend upwards in Q1 2019.

*Initial Claims leads the economy and stock market. Historically, it trends higher before a bear market in stocks started (see study).

We are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking).
If Initial Claims starts to consistently trend upwards in 2019, then we will know that a bear market has probably begun.

Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but watch out if this starts to trend upwards.
Yesterday’s reading for Continued Claims went up (from 1.661 million to 1.688 million). However, the key point is that Continued Claims are trending sideways.

Like Initial Claims, Continued Claims lead the stock market and economy.

We are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking).
If Continued Claims starts to consistently trend upwards in 2019, then we will know that a bear market has probably begun.
This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.

Read Stocks on December 17, 2018: outlook

Outlook

Here’s our discretionary fundamental outlook:

  1. For the first time since 2009, the U.S. stock market’s long term risk:reward is no longer bullish. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward.
  2. The medium term direction is still bullish  (i.e. trend for the next 6-9 months)

Our discretionary outlook is not a reflection of how we’re trading the markets right now. We trade based on our clear, quantitative trading models, such as the Medium-Long Term Model.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.