Stocks on December 17, 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. Homebuilder Sentiment is trending downwards. Long term bearish for the U.S. stock market next year.
  2. Inflation-adjusted Retail Sales are still trending higher. Suggests that the bull market in stocks probably isn’t over.
  3. Corporate profits continue to trend higher. Suggests that the bull market in stocks probably isn’t over.
  4. Freight Transportation Services is still trending upwards. Suggests that the bull market in stocks probably isn’t over.

1 am: Homebuilder Sentiment is trending downwards. Long term bearish for the U.S. stock market next year.
NAHB’s Homebuilder Sentiment has been falling throughout this year, and continues to make new lows.

This data point supports the recent weakness in housing.

Housing is a key leading indicator for the stock market and economy. With housing deteriorating in 2018, we can expect this to become a long term bearish factor in 2019.

1 am: Inflation-adjusted Retail Sales are still trending higher. Suggests that the bull market in stocks probably isn’t over.
Thursday’s reading for inflation-adjusted Retail Sales went up a little. However, the key point is that inflation-adjusted Retail Sales are still trending higher.

This suggests that the equities bull market is not over because inflation-adjusted Retail Sales typically trend sideways before an equities bear market or economic recession begins.

This chart demonstrates the positive correlation between the S&P 500 and Retail Sales.
1 am: Corporate profits continue to trend higher. A medium term bullish sign for the stock market.
Corporate profits are still trending higher, even after adjusting for inflation.

This is a medium term bullish sign for the stock market. Historically, corporate profits (inflation-adjusted) tend to go down for a few quarters before an equities bear market or “big correction” begins (see study)
1 am: Freight Transportation Services is still trending upwards. Suggests that the bull market in stocks probably isn’t over.
The Freight Transportation Services Index measures the volume of the movement of freight in the U.S. This indicator tends to flatten or fall before an equities bear market or economic recession begins.

The latest reading for the Freight Transportation Services Index made a new high for this economic expansion. But more importantly, Freight Transportation Services is still trending higher. This suggests that the bull market in stocks isn’t over.
Read Stocks on December 13, 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.