Stocks on December 13, 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. Labor market conditions remain bullish for the stock market
  2. Banks’ lending standards have yet to trend upwards, which suggests that the bull market in stocks is not over.
  3. High yield spreads are widening. Not long term bearish for the stock market.
  4. Initial Claims is trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in Q1 2019 if Initial Claims starts to trend upwards significantly.
  5. Continued Claims are trending downwards/sideways. Not long term bearish for U.S. stocks yet, but watch out if this starts to trend upwards.

Labor market conditions remain bullish for the stock market
The Kansas City Fed creates a Labor Markets Conditions Index, which is turned into a momentum indicator. This measures the strength of the labor market.
The U.S. labor market is healthy right now. This suggests that the bull market in stocks, although late-cycle, is not over. You can see that labor market conditions fell to zero at the top of previous bull market peaks.

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.
1 am: Banks’ lending standards have yet to trend upwards, which suggests that the bull market in stocks is not over.
Banks’ lending standards are still easing (trending 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: High yield spreads are widening. Not long term bearish for the stock market.
High yield spreads have been widening recently, which has made some stock market investors concerned about a further selloff.

However, it’s important to remember that it is very common for high yield spreads to widen during stock market corrections. High yield bonds behave very much like stocks (prices move inline with stock prices), which is something that Michael Milken discovered in the 1980s.
High yield spreads are only a long term concern if they trend upwards while the stock market is trending upwards.

Initial Claims is trending sideways. Not long term bearish for U.S. stocks yet, but will be bearish in Q1 2019 if Initial Claims starts to trend upwards significantly.
Yesterday’s reading for Initial Claims went down from its previous reading (from 233k to 206k). While Initial Claims have mostly been trending lower throughout 2018, they are mostly trending sideways now. Perhaps Initial Claims will start to significantly trend upwards in Q1 2019.

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

We are watching out for any SUSTAINED increase in this data series because Initial Claims are very low right now (historically speaking).
If Initial Claims starts to consistently trend upwards in 2019, then we will know that 2019 is the bull market’s top.

Continued Claims are trending downwards/sideways. Not long term bearish for U.S. stocks yet, but watch out if this starts to trend upwards.
Yesterday’s reading for Continued Claims went up (from 1.636 million to 1.661 million). However, the key point is that Continued Claims are trending downwards/sideways.

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 has less than 1 year 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.

Read Stocks on December 10, 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.