Stocks on December 10, 2018: fundamental 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 long term. Hence, leading economic indicators are also leading indicators for the stock market.

Thoughts

*We’re seeing mixed readings in the leading economic indicators right now. Some are still bullish while others are turning bearish. This is typically what happens towards the end of bull markets, when leading indicators start to deteriorate one at a time.

  1. Heavy Truck Sales are trending higher. Suggests that although this bull market is aged, it is not over.
  2. Year-over-year change in nonfarm payrolls is flat, which suggests that the bull market probably is not over.
  3. However, the unemployment rate is very low and trending sideways. This suggests that even in the most bullish case scenario, the bull market doesn’t have much room left.
  4. Philadelphia Fed’s Leading Index is trending lower: this equities bull market doesn’t have a lot of years left.
  5. 10 year – 2 year yield curve is close to inverting. This is not yet a long term bearish sign for the stock market.

1 am: Heavy Truck Sales are trending higher. Suggests that although this bull market is aged, it is not over.
The latest reading for Heavy Truck Sales went up from 529k to 542k. But more importantly, Heavy Truck Sales are still trending higher.

This suggests that the bull market is not over, even though it is certainly late-cycle. Historically, Heavy Truck Sales trended downwards before bear markets and economic recessions began (see study)

1 am: Year-over-year change in nonfarm payrolls is flat, which suggests that the bull market probably is not over.
The year-over-year change in nonfarm payrolls is trending upwards/sideways.

This suggests that the bull market and economic expansion are not over. In the past, the year-over-year growth in nonfarm payrolls trended downwards before bear markets and economic recessions began.

1 am: However, the unemployment rate is very low and trending sideways. This suggests that even in the most bullish case scenario, the bull market doesn’t have much room left.
The latest reading for the unemployment rate came in at 3.7%. The unemployment rate has been stuck here for 3 consecutive months.

The sideways trending unemployment rate is a reflection of the sideways trending Initial Claims. This is not yet a long term bearish sign for the stock market because the Unemployment Rate has yet to trend upwards. If the Unemployment Rate starts to trend upwards in 2019, that will be a long term bearish sign for the stock market in 2019.
HOWEVER, with the Unemployment Rate so low, it’s reasonable to expect that even in a most optimistic scenario, this bull market doesn’t have a lot of room left.
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 trending downwards right now.

Historically, this means that we are close 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: 10 year – 2 year yield curve is close to inverting. This is not yet a long term bearish sign for the stock market. 
The 10 year – 2 year yield curve is close to inverting. It is currently at 0.12%

This is not yet a long term bearish sign in the stock market. In the past, the bull market and economic expansion usually ended 0.5 – 2 years AFTER the 10 year – 2 year yield curve inverted.
Read Stocks on December 6, 2018: outlook

Outlook

Here’s our discretionary fundamental outlook:

  1. For the first time since 2009, the U.S. stock market’s long term risk:reward is no longer bullish. This doesn’t necessarily mean that the bull market is over. We’re merely talking about long term risk:reward.
  2. The medium term direction is still bullish  (i.e. trend for the next 6-9 months)

Our discretionary outlook is not 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.