Foreign investment inflows, improving economy, S&P negative streak

Foreign investment

The past 12 months saw record inflows into U.S. equities from foreign investors. It’s also interesting to note that foreign investment was consistently low until the mid-1990s when globalization really picked up steam.

Looking at nominal numbers doesn’t really make sense since fiat currencies are constantly being inflated. To make this indicator more range-bound, we can look at foreign investment in terms of inflation-adjusted dollars:

The chart above demonstrates that foreigners have rushed into U.S. stocks at the fastest pace ever (in real dollars), exceeding prior peaks in early-2001 and 2007.

I would consider this to be a long term warning sign.

Improving Economy

The U.S. and global economy is improving. The Conference Board Leading Economic Index has gone up for 9 straight months.

When this happened in the past, this was bullish sign for the S&P 500 over the next 6-9 months.

S&P 500’s negative streak

The S&P 500 fell for the 5th consecutive day for the first time in almost a year. Since after 1959, this was quite a bullish sign for stocks on all time frames.

Conclusion: market outlook

Here’s how I think about markets based on 3 different strategies & time frames.

  1. Long term investors should be highly defensive right now. Look for opportunities away from public equities where there is less long term risk.
  2. Medium term contrarian traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
  3. Short term trend-focused portfolios should continue to ride the bull trend because no one knows exactly when it will end.

My discretionary market outlook does not reflect how I trade the markets right now. I trade based on my trading algorithm that cuts through the noise of endless research, indicators and charts.

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