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The economy and stock market move in the same direction in the medium-long term. Hence, leading economic indicators are also leading indicators for the stock market.
- Corporate profits continue to trend higher. A medium term bullish sign for the stock market.
- Margin debt growth is falling, which isn’t what you see in the end of a bull market.
- High yield spreads are starting to rise. The last leg of this bull market hasn’t happened yet.
- Homebuilder Sentiment is starting to weaken. Long term bearish for the U.S. stock market next year.
Read Buy the dip is dead
1 am: Corporate profits continue to trend higher. A medium term bullish sign for the stock market.
Corporate profits are still trending higher, even after adjusting for inflation.
This is a medium term bullish sign for the stock market. Historically, corporate profits (inflation-adjusted) tend to go down for a few quarters before an equities bear market or “big correction” begins (see study)
1 am: Margin debt growth is falling, which isn’t what you see in the end of a bull market.
Margin debt continues to rise with the U.S. stock market.
However, the year-over-year % change in margin debt is more important. The year-over-year % change tends to spike towards the end of an equities bull market. Without a spike, the current bull market will probably continue.
1 am: High yield spreads are starting to rise. The last leg of this bull market hasn’t happened yet.
High yield spreads are starting to rise along with the stock market’s decline.
Bond market participants are smarter than stock market participants, which is why the bond market is a leading indicator for the stock market. Historically, high yield spreads widen (trends higher) BEFORE bull markets top (see 2007 and 2000).
Since the high yield spread made a new low during the September 2018 stock market top, this suggests that September 2018 was the top before a correction and not the top before a bear market.
1 am: Homebuilder Sentiment is starting to weaken. Long term bearish for the U.S. stock market next year.
NAHB’s Homebuilder Sentiment has been falling throughout this year, and continues to make new lows.
This data point supports the recent weakness in housing.
Housing is a key leading indicator for the stock market and economy. With housing deteriorating in 2018, we can expect this to become a long term bearish factor some time in 2019.
Read Stocks on November 15, 2018: outlook
Here’s what I think will happen based on our discretionary outlook:
- The S&P 500 has less than 3 quarters left in this bull market (bull market top sometime in Q2 2019).
- The recent decline is just a correction in a bull market. The medium term direction is still bullish (i.e. trend for the next 6-9 months)
Our discretionary outlook is usually, but not always, a reflection of how we’re trading the markets right now. We trade based on our clear, 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.