Stocks on October 23, 2018: outlook


*These are my discretionary thoughts on the market. Go to the blog for my latest market outlook. Members can go here to see our trading model’s latest updates.
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. Low levels of growth in margin debt suggests that the bull market still has room to run.
  2. Corporate profits continue to trend higher. A medium term bullish sign for the stock market.
  3. Homebuilder Sentiment is starting to weaken. Bearish for the U.S. stock market next year.
  4. Breadth is extremely oversold. A medium term bullish sign for the stock market.

Read 4 signs that the stock market will retest, rally, then peak in 2019
1 am: Low levels of growth in margin debt suggests that the bull market still has room to run.
Margin debt continues to rise with the U.S. stock market.

However, the year-over-year % change in margin debt is more important. The % change tends to spike towards the end of an equities bull market. Without a spike, the current bull market will probably continue.
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: Homebuilder Sentiment is starting to weaken. Bearish for stocks next year.
NAHB’s Homebuilder Sentiment has been falling throughout this year.

This data point supports the recent weakness in housing. While this isn’t a major concern yet, watch out if it continues for another few months. If it does, then it’ll be a long term bearish factor for the stock market in 2019.

*Housing is a key leading indicator for the stock market and economy.
1 am: Breadth is extremely oversold. A medium term bullish sign for the stock market.
The McClellan Summation Index for the New York Stock Exchange and NASDAQ are both very low right now. In other words, breadth is extremely oversold, suggesting a medium term rally soon.


As you can see, even at the start of a bear market (e.g. 2000-2002 and 2007-2009), such oversold readings usually lead to a medium term bounce as well.
*I don’t place too much emphasis on the McClellan Summation Index. This indicator is based on the NYSE and NASDAQ. As we’ve noted before, these 2 exchanges are heavily influenced by foreign stocks and bond funds (especially the NYSE). The S&P 500 is much more representative of the “U.S. stock market”.
Read Stocks on October 19, 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. I will scale out of my long positions throughout 2019

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.

4 comments add yours

  1. Troy, at some point are u going to increase to 100% as this is a cycle low to make new highs in the next months? Thanks

    • No.
      Not going over 67% long until the end of this bull. We’re getting close, but not quite there yet.

  2. Troy,
    Today S&P retested a new low below 200 dma intraday, but ended higher than the 10/11 end-of-day low. In your theory, does it count as a valid retest? Or we should wait for an end-of-day retest?
    Thanks!

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