January 7, 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. Nonfarm payrolls is trending upwards. This suggests that the bull market is not over
  2. However, the unemployment rate is very low and trending sideways. This suggests that even in the most bullish case scenario, the bull market doesn’t have much room left.
  3. Financial conditions are very low and could trend upwards. If financial conditions start to trend upwards (tighten), that will be a long term bearish sign for the stock market.

Read Breadth is very strong while stocks are surging. What’s next for stock
Nonfarm payrolls is trending upwards. This suggests that the bull market is not over
The year-over-year change in nonfarm payrolls is trending upwards/sideways.

This suggests that the bull market and economic expansion are not over. In the past, the year-over-year growth in nonfarm payrolls trended downwards before bear markets and economic recessions began.

However, the unemployment rate is very low and trending sideways. This suggests that even in the most bullish case scenario, the bull market doesn’t have much room left.
The latest reading for the unemployment rate increased from the previous reading (from 3.7% to 3.9%). The unemployment rate is trending sideways, and could trend higher in the next 2 months due to the government shutdown.

The sideways trending unemployment rate is a reflection of the sideways trending Initial Claims. This is not yet a long term bearish sign for the stock market because the Unemployment Rate has yet to trend upwards. If the Unemployment Rate starts to trend upwards this year, that will be a long term bearish sign for the stock market this year
With the Unemployment Rate so low, it’s reasonable to expect that even in a most optimistic scenario, this bull market doesn’t have a lot of room left.
Financial conditions are very low, and could trend upwards. If financial conditions start to trend upwards (tighten), that will be a long term bearish sign for the stock market.
Financial conditions are still very loose despite the stock market’s crash in Q4 2018.


This is not a long term bearish factor for the stock market right now because historically, financial conditions tightened significantly before bear markets and recessions started.
Financial conditions will probably tighten throughout 2019 as the yield curve inverts. Hence, this will become more and more of a long term bearish factor for the stock market as 2019 progresses.
Read Stocks on January 3, 2019: fundamental outlook

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 is still bullish  (i.e. trend for the next 6 months). However, if this is the start of a bear market, bear market rallies typically last 3 months. They are shorter in duration.
  3. The stock market’s short term has a slight bearish lean. Focus on the medium-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, such as the Medium-Long Term Model.
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