Stocks on October 8, 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. Unemployment Rate continues to trend downwards. Confirms the bull market’s rally
  2. Banks’ lending standards are easing even more. Medium-long term bullish for the stock market.
  3. Net earnings revisions are still positive. Medium-long term bullish sign for the stock market.
  4. The Equity Put/Call Ratio spiked last Friday. Suggests that any short term weakness is limited.
  5. Homebuilders are down 13 days in a row. Unprecedented.
  6. Some random stock market statistics.

Read “When interest rates increased this much over the past 2 years, a crisis always ensued”
1 am: Unemployment Rate continues to trend downwards. Confirms the bull market’s rally
Last Friday’s latest data demonstrates that the U.S. unemployment rate continues to trend downwards.

This confirms the bull market’s rally. Historically, the Unemployment Rate:

  1. Bottomed at around the same time as when the stock market peaked.
  2. Bottomed and trended upwards before economic recessions began.


As you can see, the Unemployment Rate is low, which suggests that we are certainly in the late stages of this economic expansion cycle. With that being said, leading indicators like Initial Claims continue to improve, which suggests that this economic expansion and bull market still have some room to run.

1 am: Banks’ lending standards are easing even more. Medium-long term bullish for the stock market.
Banks’ lending standards continue to ease (trend downwards).

Easing lending standards is a medium-long term bullish sign for the stock market and economy. It gives this aged economic expansion and bull market a little more juice via easier loans and more credit.
As you can see, lending standards tend to get tighter in the last rally of a bull market.

1 am: Net earnings revisions are still positive. Medium-long term bullish sign for the stock market.
The S&P 500’s net earnings revisions are still significantly positive.

The S&P 500’s Net Earnings Revisions turns negative before economic recessions and equity bear markets begin. During economic expansions, it has shown mixed performances because analysts tend to downgrade their earnings expectations as the year goes on. That’s why negative Net Earnings Revisions is a necessary but not sufficient requirement for equities bear markets and economic recessions.
Net Earnings Revisions is far from negative right now. A bear market is not imminent. HOWEVER, you can see that this data is trending downwards. It will likely turn negative in 2019.
1 am: The Equity Put/Call Ratio spiked last Friday. Suggests that any short term weakness is limited.
The Equity Put/Call Ratio (a contrarian indicator) spiked last Friday, suggesting some short term fear in the stock market.

Historically, this has meant that short term weakness for the stock market over the next month was limited. The stock market wasn’t always at a short term bottom, but getting close.

1 am: Homebuilders are down 13 days in a row. Unprecedented.
$XHB (homebuilder ETF) is now down 13 days in a row. From 2006 – present, this is unprecedented.
*The data on this stat is very limited.

1 am: some random stock market statistics.
The NASDAQ has fallen more than 1% for 2 days in a row, while above its 200 daily moving average. Forward returns are mostly random.



Meanwhile, the Russell 2000 has fallen 4 out of the past 5 weeks, while still above its 40 weekly moving average (aka 200 daily moving average). Forward returns are mostly random.

Read Stocks on October 5, 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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