January 31, 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. New Home Sales remains in a downtrend. A long term bearish factor for stocks
  2. Inflation-adjusted net value added of nonfinancial corporate business is trending sideways. A late-cycle symptom.
  3. 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.
  4. If Continued Claims trends upwards over the next few weeks/months, watch out.

Read After a terrific January for stocks, what’s next
New Home Sales remains in a downtrend. A long term bearish factor for stocks
Housing is one of the earliest leading sectors for the stock market and economy. The latest reading for New Home Sales spiked from its previous reading.

This report is for November 2018, before the government shutdown. (Now that the shutdown is over, a lot of delayed data is being released).
Based on the real estate agents that we follow, New Home Sales for December 2018 (latest data) will fall from November’s reading.
In other words, real estate remains weak, but not terribly weak for Q1 2019.
Housing is still one of the weak points in the economy.
Historically, New Home Sales trended downwards before recessions and bear markets began.

1 am: Inflation-adjusted net value added of nonfinancial corporate business is trending sideways. A late-cycle symptom.
The inflation-adjusted net value added of nonfinancial corporate business is trending sideways. (The recent slight increase is most likely due to Trump’s tax cut. Reagan’s tax cut in the mid-1980s resulted in the same thing).


This suggests that we are in the late stages of this economic expansion and bull market.
*This is not a tool for timing the bull market’s top.
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 spiked (from 200k to 253k). The key point is that Initial Claims has not yet trend upwards.
*The recent spike is probably related to the government shutdown.

*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 Continued Claims trends upwards over the next few weeks/months, watch out. 
Yesterday’s reading for Continued Claims went up (from 1.713 million to 1.782 million). Continued Claims are trending sideways now, and could potentially trend upwards over the next few weeks/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. 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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