March 15, 2019: fundamental outlook for stocks


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. This is typically what happens towards the end of bull markets, when leading indicators start to deteriorate one at a time.

  1. Industrial Production growth is rolling over. Something to watch out.
  2. Freight Transportation Services Index continues to trend up. Suggests that the bull market isn’t over.
  3. Initial Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish if Initial Claims starts to trend upwards significantly.
  4. Continued Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish if Continued Claims starts to trend upwards significantly.

Read Is the stock market high?
Industrial Production growth is rolling over. Something to watch out.
Year-over-year Industrial Production growth is rolling over.

This isn’t something that’s immediately bearish for stocks, but bulls should be vigilant.

  1. Sometimes falling industrial production growth is a false bearish signal.
  2. Somtimes growth turns negative after recessions and bear markets begin.

Overall, not a very useful timing indicator.
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.

Initial Claims are trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in 2019 if Initial Claims starts to trend upwards significantly.
Yesterday’s reading for Initial Claims went up (from 223k to 229k). The key point is that Initial Claims is trending sideways

*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 will be bearish in 2019 if Continued Claims starts to trend upwards significantly.
Yesterday’s reading for Continued Claims went up (from 1.758 million to 1.776 million). Continued Claims are trending sideways now, and could potentially trend upwards over the next few 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. In a most optimistic scenario, the bull market probably has 1 year left. Long term risk:reward is more important than trying to predict exact tops and bottoms.
  2. The medium term direction (e.g. next 6-9 months) is more bullish than bearish.
  3. The stock market’s short term has a bearish lean due to the large probability of a pullback/retestFocus 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 does not reflect how we trade the markets right now. We trade based on our quantitative trading models. When our discretionary outlook conflicts with our models, we always follow our 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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