January 17, 2019: 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. Homebuilder sentiment is trending downwards. A long term warning sign.
  2. Truck Tonnage continues to trend up. Suggests that the bull market isn’t over.
  3. Freight Transportation Services Index continues to trend up. Suggests that the bull market isn’t over.
  4. 10 year Treasury yield is close to being inverted. Not yet a long term bearish sign for stocks, but will be once it inverts.
  5. Initial Claims are trending sideways/upwards. Not long term bearish for U.S. stocks yet, but will be bearish in Q1 2019 if Initial Claims starts to trend upwards significantly.
  6. Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but watch out if this starts to trend upwards.

Read Stock market’s medium term is no longer bullish. It is now mixed.
Homebuilder sentiment is trending downwards. A long term warning sign.
Housing indicators are the earliest of long term leading indicators. While the latest reading for NAHB Housing went up a little, the key point is that this figure is trending downwards.

This figure trended downwards before a lot of historical bear markets and recessions began, with few false signals.
Truck Tonnage continues to trend up. Suggests that the bull market isn’t over.
Truck Tonnage measures the volume of the movement of freight in the U.S. This indicator tends to flatten or fall before an equities bear market or economic recession begins.
The latest reading for Truck Tonnage continues to trend higher. This suggests that the bull market in U.S. stocks will continue.

This is a longer term chart for Truck Tonnage (not updated, from Bill McBride).

Freight Transportation Services Index continues to trend up. Suggests that the bull market isn’t over.
Like Truck Tonnage, the Freight Transportation Services Index continues to trend upwards. This indicator tends to flatten or fall before an equities bear market or economic recession begins.

10 year Treasury yield is close to being inverted. Not yet a long term bearish sign for stocks, but will be once it inverts.
The 10 year Treasury yield is close to inverting. It is now hovering at around 0.18%

The more important 10 year – 3 month yield curve is also close to inverting.

Once these 2 yield curve invert, they will be long term bearish factors for stocks.
Initial Claims are trending sideways/upwards. 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 down a little from its previous reading (from 216k to 213k). While Initial Claims have mostly been trending lower throughout 2018, they are 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).
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 1.719 million to 1.737 million). However, the key point is that Continued Claims are trending sideways.

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. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (i.e. next 3-6 months) is neutral. Some market studies are medium term bullish while others are medium term bearish
  3. The stock market’s short term has a slight bearish lean. 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 is not a reflection of how we’re trading the markets right now. We trade based on our quantitative trading models.
Members can see exactly how we’re trading the U.S. stock market right now based on our trading models.
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