March 21, 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. Delinquency Rate on All Loans is trending down. A bullish sign for the stock market.
  2. Homebuilder sentiment is still in a downtrend. A long term warning sign.
  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.

Delinquency Rate on All Loans is trending down. A bullish sign for the stock market.
The Delinquency Rate on All Loans is trending down.


This suggests that the bull market and economic expansion are not over. In the past, the Delinquency Rate trended higher before bear markets and recessions began.
Homebuilder sentiment is still in a downtrend. A long term warning sign.
The latest reading for NAHB Homebuilder Sentiment went sideways from its previous reading.

The key point is that NAHB Homebuilder Sentiment is trending downwards. This downwards trend is not significant, so it is not a clear long term bearish sign for stocks yet. It is merely a long term warning sign.

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 down (from 230k to 221k). 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/upwards. 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 down (from 1.777 million to 1.750 million). Continued Claims are trending sideways/upwards now, and could potentially trend upwards significantly 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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