February 26, 2019: fundamental outlook for stocks


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. This is typically what happens towards the end of bull markets, when leading indicators start to deteriorate one at a time.
*An imminent recession is very unlikely right now.

  1. Delinquency Rate on All Loans is trending down. A bullish sign for the stock market.
  2. Housing Starts is deteriorating. Bulls should watch out if this weakness persists for a few more months.
  3. Building Permits is trending sideways. Not a long term concern for the stock market yet, but something to watch out for.
  4. Initial Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish if Initial Claims starts to trend upwards significantly.
  5. Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish if Continued Claims starts to trend upwards significantly.

Read Stock market’s rally is slowing down. What’s next for stocks
Delinquency Rate on All Loans is trending down. A bullish sign for the stock market.
The Delinquency Rate on All Loans is trending down.

This suggests that the bull market and economic expansion are not over. In the past, the Delinquency Rate trended higher before bear markets and recessions began.
Housing Starts is deteriorating. Bulls should watch out if this weakness persists for a few more months.
The latest reading for Housing Starts fell from its previous reading (1214k to 1078k). The key point is that Housing Starts has begun to trend downwards.

Historically, Housing Starts trended downwards before bear markets and recessions began.

Since the recent downtrend in Housing Starts is not yet significant, we treat this as a warning sign instead of a long term bearish sign.
If the weakness in Housing Starts persists for a few more months, then we will treat this as a long term bearish sign for stocks.
Building Permits is trending sideways. Not a long term concern for the stock market yet, but something to watch out for.
The latest reading for Building Permits went up from its previous reading (1322k to 1326k). The key point is that Building Permits is trending sideways.

In the past, Building Permits trended downwards significantly before bear markets and recessions began.

This is not a bearish sign for the stock market.
Initial Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in 2019 if Initial Claims starts to trend upwards significantly.
Yesterday’s reading for Initial Claims went down (from 239k to 216k). The key point is that Initial Claims is trending sideways

*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).
Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in 2019 if Continued Claims starts to trend upwards significantly.
Yesterday’s reading for Continued Claims went down (from 1.780 million to 1.725 million). Continued Claims are trending sideways now, and could potentially trend upwards over the next few months

Like Initial Claims, Continued Claims leads 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).

Conclusion

Here is our discretionary market outlook:

  1. The U.S. stock market’s long term risk:reward is no longer bullish. In a most optimstic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (e.g. next 6-9 months) is more bullish than bearish.
  3. The stock market’s short term has a bearish lean due to the large probability of a pullback/retest. Focus on the medium-long term (and especially the long term) because the short term is extremely hard to predict.

Goldman Sachs’ Bull/Bear Indicator demonstrates that while the bull market’s top isn’t necessarily in, risk:reward does favor long term bears.

Our discretionary outlook does not reflect how we trade the markets right now. We trade based on our quantitative trading models. When our discretionary outlook conflicts with our models, we always follow our models.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.
Click here for more market studies