March 8, 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. Heavy Truck Sales is still making new highs. Suggests that the bull market and economic expansion are not over.
  2. Housing Starts is trending sideways/downwards. Something that bulls should watch out for
  3. Building Permits is trending sideways. Something that bulls should watch out for
  4. 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.
  5. 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.

Heavy Truck Sales is still making new highs. Suggests that the bull market and economic expansion are not over.
The latest reading for Heavy Truck Sales made a new high for this economic expansion.

In the past, Heavy Truck Sales trended downwards before bear markets and recessions began. This economic indicator suggests that the bull market in stocks and economic expansion are not over.
Housing Starts is trending sideways/downwards. Something that bulls should watch out for
Housing is one of the earliest leading sectors for the stock market and economy. The latest reading for Housing Starts went up from its previous reading.

However, the key point is that Housing Starts is still trending sideways / downwards. Historically, Housing Starts trended downwards before recessions and bear markets began.

Housing is a weak point in the U.S. economy. This is something that bulls should watch out for if the weakness in Housing Starts persists for a few more months.
Building Permits is trending sideways. Something that bulls should watch out for
The latest reading for Building Permits went up from its previous reading.

However, the key point is that Building Permits is trending sideways. Historically, Building Permits trended downwards before recessions and bear markets began.

This is not yet a long term bearish sign for the U.S. economy and stock market, but is something that bulls should watch out for.
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 226k to 223k). 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 down (from 1.805 million to 1.755 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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