January 24, 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. Although flat, the Conference Board’s Leading Economic Index has yet to trend downwards. Not yet a long term bearish sign for the stock market.
  2. Delinquency Rate is trending downwards. Suggests that the bull market isn’t over.
  3. Corporate profits continue to trend higher. Suggests that the bull market in stocks probably isn’t over.
  4. Initial Claims are trending sideways/upwards. Not long term bearish for U.S. stocks yet, but will be bearish in 2019 if Initial Claims starts to trend upwards significantly.
  5. Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but watch out if this starts to trend upwards.

Read In a most optimistic scenario, the bull market has 1 year left
Although flat, the Conference Board’s Leading Economic Index has yet to trend downwards. Not yet a long term bearish sign for the stock market.
The Conference Board’s Leading Economic Index is mostly flat compared to where has been over the past few months. However, the key point is that this leading indicator has yet to trend downwards.

In the past, the Conference Board’s Leading Economic Index trended downwards before bear markets and recessions began. We built a trading model based on the Conference Board’s Leading Economic Index
Delinquency Rate is trending downwards. This is not how bear markets start.
Delinquency Rates on All Loans is making new lows for this economic expansion. But more importantly, Delinquency Rates on loans is still trending downwards.

This suggests that although late-cycle, the bull market and economic expansion aren’t over. As you can see in the chart below, Delinquency Rates tend to trend higher before equity bear markets and economic recessions begin.

Corporate profits continue to trend higher. A medium term bullish sign for the stock market.
Corporate profits are still trending higher, even after adjusting for inflation.

This suggests that the bull market is not over. Historically, corporate profits (inflation-adjusted) tend to go down for a few quarters before an equities bear market or recession begins (see study)
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 made a new low for this economic expansion (from 212k to 199k). The key point is that Initial Claims has not yet trend upwards

*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 1.737 million to 1.713 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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