Stocks on November 2, 2018: fundamental outlook


*Go to the blog for my latest market outlook. Members can go here to see our trading model’s latest updates and how we’re trading the U.S. stock market right now based on these models.
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.

Thoughts

  1. Durable Goods are going up. Neither long term bullish nor bearish for U.S. stocks.
  2. Initial Claims is starting to trend sideways. Not yet bearish for U.S. stocks, but will be bearish in 2019 if Initial Claims start to trend upwards.
  3. Continued Claims are still trending downwards. Still medium term bullish for the U.S. stock market.
  4. Higher mortgage rates are constricting the housing market. However, the next bear market and recession is unlikely to be like the last one.

Read Sharp corrections and bounces are usually followed by a retest
1 am: Durable Goods are going up. Neither long term bullish nor bearish for U.S. stocks.
Durable Goods continue to grow.

This is neither long term bullish nor bearish for the stock market. Historically, Durable Goods peaked at around the same time as the U.S. stock market and economy.
1 am: Initial Claims is starting to trend sideways. Not yet bearish for U.S. stocks, but will be bearish in 2019 if Initial Claims start to trend upwards.
Yesterday’s reading for Initial Claims went down a little from its previous reading (from 216k to 214k). While Initial Claims have mostly been trending lower, they are now starting to trend sideways right now.

*Initial Claims lead the economy and stock market. Historically, it trends higher before a bear market in stocks started (see study).

This suggests that the bull market in stocks is not over because Initial Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking).
At such low levels, Initial Claims will probably trend upwards in 2019.

1 am: Continued Claims are still trending downwards. Still medium term bullish for the U.S. stock market.
Yesterday’s reading for Continued Claims made a new low for this economic expansion. The key point is that Continued Claims are still trending lower right now.

Like Initial Claims, Continued Claims lead the stock market and economy.
This suggests that the bull market in stocks is not over because Continued Claims have not trended higher yet. HOWEVER, we are watching out for any SUSTAINED increase in this data series because Continued Claims are very low right now (historically speaking). We are trying to catch the bull market’s top because the bull market most likely only has 1 year left.

This chart demonstrates the inverse correlation between the S&P 500 and Continued Claims. A downwards trending Continued Claims = medium-long term bullish for the stock market.

1 am: Higher mortgage rates are constricting the housing market. However, the next bear market and recession is unlikely to be like the last one.
Higher interest rates are starting to constrict the U.S. housing market. Here’s the year-over-year change in the 30 year mortgage rate – inflation.

However, the next recession and bear market is unlikely to be like the last one (2008). Despite rising interest rates, it is still historically easy for households to finance their debts.
The absolute level of debt doesn’t matter. What matters is whether or not households can finance their debts.

As you can see, household debt payments as a % of disposable income is still much lower than it was in 2007.
Read Stocks on October 31, 2018: outlook

Outlook

Here’s what I think will happen based on our discretionary outlook:

  1. The S&P 500 has less than 1 year left in this bull market (bull market top sometime in 2019).
  2. 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.

2 comments add yours

  1. Hi Troy
    It would be interesting to know what must happen (fundementaly, technicaly) that you would change your view for the short term e.g. changing your outlook of market peak in Q2 2019 to Q1 2019 or even earlier? What would be the trigger?
    Thanks
    Stefan

Leave a Comment