Stocks on October 16, 2018: outlook


*These are my discretionary thoughts on the market. My Medium-Long Term model determines my trades. Go to the blog for my latest market outlook.
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. Inflation-adjusted Retail Sales are still trending higher. A medium-long term bullish sign for the stock market and economy.
  2. Ed Yardeni expects forward earnings to keep growing. A medium-long term bullish sign for the stock market.
  3. Delinquency Rate is trending downwards. Medium-long term bullish for the stock market
  4. Paul Desmond: why you should ignore the NYSE Index

Read More signs that the stock market will go lower before heading higher
1 am: Inflation-adjusted Retail Sales are still trending higher. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for inflation-adjusted Retail Sales went up a little. However, the key point is that inflation-adjusted Retail Sales are still trending higher.

This is a medium-long term bullish sign for the stock market because inflation-adjusted Retail Sales typically trend sideways before an equities bear market or economic recession begins.
This chart demonstrates the positive correlation between the S&P 500 and Retail Sales.

1 am: Ed Yardeni expects forward earnings to keep growing. A medium-long term bullish sign for the stock market.
The stock market moves in the same direction as the economy in the long run because the stock market moves in the same direction as corporate earnings in the long run (economy drives corporate earnings). Ed Yardeni’s forecasts for the S&P 500’s forward earnings are among the most accurate on Wall Street.
He expects earnings to grow throughout the rest of this year and next year. So even if earnings growth does slow down (which it will, because earnings growth surged in 2018 from the one-time Trump tax cut), this is still a medium-long term bullish factor for the U.S. stock market right now.
*You can see how earnings and the stock market peaked at the same time in the past.

1 am: Delinquency Rate is trending downwards. Medium-long term bullish for the stock market
Delinquency Rates on loans from commercial banks are still trending downwards.

This is a medium-long term bullish sign for the stock market and economy. As you can see in the chart below, Delinquency Rates tend to trend higher before equity bear markets and economic recessions begin.

1 am: Paul Desmond: why you should ignore the NYSE Index
I couple of weeks ago I was saying that the U.S. stock market’s breadth wasn’t as bad as people thought. My argument was:
Yes, the NYSE’s breadth is terrible. But the NYSE (New York Stock Exchange) doesn’t even represent the U.S. stock market the way it used to.
Georgios (one of my readers) was kind enough to share this link (click here and here): from Paul Desmond

So there you have it. The reason why breadth was “terrible” leading up to the recent crash was because:

  1. Foreign stocks were sinking.
  2. U.S. bond funds were sinking (because interest rates were rising).

Read Stocks on October 12, 2018: outlook

Outlook

Here’s what I think will happen based on my discretionary outlook.

  1. The S&P 500 has approximately 1 year left in this bull market (bull market top sometime in 2019).
  2. I will scale out of my long positions throughout 2019 (see why)

I am 67% long SSO right now (2x S&P 500 ETF) because my Medium-Long Term model does not foresee a big correction or bear market at this point in time. (This is a step down from being 100% long SSO previously). I ignore small corrections. I only sidestep big corrections and bear markets.
The Medium-Long Term Model has been bullish since February 8, 2016 – present. I have been long the S&P 500 since September 7, 2017 when it was at 2465.

Leave a Comment