Stocks on October 5, 2018: outlook


*These are my discretionary thoughts on the market. My Medium-Long Term model determines my trades. Go to the homepage 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. Equity Put/Call Ratio spiked. Perhaps some more short term downside.
  2. Philadelphia Fed’s Leading Index is falling: this equities bull market doesn’t have a lot of years left.
  3. Total Household Debt is rising. Not bearish for the stock market
  4. Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
  5. Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.

Read Interest rates SURGED. Is this bearish for the stock market?
Read The end of low volatility in the stock market
1 am: Equity Put/Call Ratio spiked. Perhaps some more short term downside.
The Equity Put/Call Ratio spiked yesterday when the stock market tanked.
This is not yet a short term bullish sign for the stock market.

As you can see, the Equity Put/Call Ratio tends to be a little higher before the stock market gets close to a short term bottom.
If the S&P falls another 1-2 days, then the Put/Call will probably spike to a level that supports a short term bottom. Perhaps a touch of the trendline support?

1 am: Philadelphia Fed’s Leading Index is falling: this equities bull market doesn’t have a lot of years left.
The Philadelphia Fed’s Leading Index is falling right now. More importantly, this Leading Index is trending lower.

Historically, this means that we are closer to the end of the economic expansion & bull market. In the past, this Leading Index reached 1% or lower before a bear market began. We’re not quite there yet, but getting there.

1 am: Total Household Debt is rising. Not bearish for the stock market
Household debt is still going up. Contrary to what the permabears tell you, this is not a bearish factor for the U.S. stock market right now. Debt pretty much always goes up in the long run because of inflation.

Even when adjusting for inflation, you can see that debt has gone up.

So why isn’t debt a concern for the stock market or economy right now?
Rising debt is not a problem as long as households can service their debt. Households have no problem servicing their debts right now even though debt levels and interest rates are rising. This is because disposable income is rising alongside with debt.

1 am: Initial Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for Initial Claims fell from the previous week’s reading (215k to 207k).  The key point is that Initial Claims are still trending lower right now.

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

We use Initial Claims data in these 2 trading models (here and here). These 2 trading models state that you should be long stocks right now because Initial Claims data is still trending downwards.
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). We are trying to catch the bull market’s top because the bull market most likely only has 1-2 years left.

Flipping the Initial Claims axis makes the inverse relationship between Initial Claims & the S&P very clear.

1 am: Continued Claims are still trending lower. A medium-long term bullish sign for the stock market and economy.
Yesterday’s reading for Continued Claims fell from the previous week’s reading (1663k to 1650k). However, the key point is that Continued Claims are still trending down.

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 1-2 years 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.

Flipping the Continued Claims axis makes the inverse relationship between Continued Claims & the S&P very clear.

Read Stocks on October 4, 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.
I have been long the S&P 500 since September 7, 2017 when it was at 2465.

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