March 29, 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. Corporate profits continue to trend higher. Suggests that the bull market in stocks probably isn’t over.
  2. New Home Sales is trending sideways. Not a long term bearish factor for stocks right now.
  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.

Corporate profits continue to trend higher. Suggests that the bull market in stocks probably isn’t over.
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)
New Home Sales is trending sideways. Not a long term bearish factor for stocks right now.
The latest reading for New Home Sales went up from its previous reading. But more importantly, New Home Sales is trending sideways right now.

In the past, New Home Sales trended downwards before bear markets and recessions began.

This is not yet a long term bearish factor for the stock market. Stay vigilant over the next few months in case New Home Sales does trend downwards significantly.
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 216k to 211k). 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 up (from 1.743 million to 1.756 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 mostly mixed, although there is a bullish lean.

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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