Stocks on October 25, 2018: 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. Fear & Greed Index (Sentiment Indicator) registers extreme fear.
  2. New Home Sales are deteriorating. Bearish for the stock market in 2019
  3. Building Permits are deteriorating. Bearish for the stock market in 2019
  4. Buyback blackout period = bearish for stocks in October, and bullish for stocks in November.

1 am: Fear & Greed Index (Sentiment Indicator) registers extreme fear.
CNN’s Fear & Greed Index (a sentiment indicator) is registering extreme fear right now.

Here’s how low this is.

This tells you that the short term risk:reward increasingly favors bulls.
1 am: New Home Sales are deteriorating. Bearish for the stock market in 2019
New Home Sales’ latest reading went down from 585k to 553k. But more importantly, New Home Sales are finally starting to trend downwards.

*New Home Sales tend to fall for 1-2 years BEFORE the equities bull market ends. New Home Sales is starting to trend downwards. This will be a bearish sign for the stock market in 2019.

1 am: Building Permits are deteriorating. Bearish for the stock market in 2019
Building Permits’ latest reading went up a little, from 1249k to 1270k. But more importantly, New Home Sales are finally starting to trend downwards.

*Building Permits tend to fall for 1-2 years BEFORE the equities bull market ends. Building Permits is starting to trend downwards. This will be a bearish sign for the stock market in 2019.

The next recession and bear market will probably be more similar to the 2000-2002 bear market than the 2007-2009 bear market. The recession will probably be shallow, but the stock market’s decline will be > 40%.
I highly recommend you read these 2 articles by Tim Duy and Bill McBride. No need to panic right now, but watch out if the weakness in housing continues in the next few months.
1 am: Buyback blackout period = bearish for stocks in October, and bullish for stocks in November.
Perhaps this explains the recent stock market mini-crash.

Late-September to the end of October is the “blackout period” for stock buybacks. A “blackout period” = 5 weeks before an earnings report during which companies aren’t allowed to buy back their stocks.
*Earnings season is in the second half of October.
As you probably know, share buybacks have SOARED this year, putting a floor under the stock market. With the absence of share buybacks right now, the stock market is experiencing short term weakness. Once buybacks resume in November…. you put 2 and 2 together.
Buybacks are just 1 factor to consider, but they’ve been an important factor for stocks this year.
Remember this study from a few weeks ago:
The stock market usually rallies after a midterm election (e.g. November 2018).

But the stock market also usually experiences some short term weakness before the election.

Read Stocks on October 23, 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 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. Predicting when the market will make new highs is always hard. I prefer the prediction “there will be a new high before this bull market ends”

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