Stocks on December 6, 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 medium-long term. Hence, leading economic indicators are also leading indicators for the stock market.

Thoughts

  1. Net earnings revisions just turned negative. A long term bearish sign.
  2. Financial conditions are still trending sideways/downwards. Suggests that the bull market is not over.
  3. 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.
  4. Continued Claims are trending downwards/sideways. Not long term bearish for U.S. stocks yet, but watch out if this starts to trend upwards.

*We’re seeing mixed readings in the economic data: some long term bullish and some long term bearish. This is typically what happens at the end of bull markets, when the bull market is in a topping process.
1 am: Net earnings revisions just turned negative. A long term bearish sign.
Throughout 2017-2018, Net Earnings Revision has been a consistent reason to stay long term bullish on the stock market. This is no longer a long term bullish factor for the stock market.
The S&P 500’s net earnings revisions has now become negative for the first time in almost 2 years.

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.
This “necessary but not sufficient requirement for bear markets” has now been fulfilled.
1 am: Financial conditions are still trending sideways/downwards. Suggests that the bull market is not over.
Despite rising interest rates, financial conditions are still relatively easy in the U.S. In the past, financial conditions were tighter when recessions and bear markets began. More importantly, credit conditions tightened (i.e. trended upwards) before bear markets and recessions began.
This sign suggests that the bull market is not over right now.

1 am: 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 235k to 230k). While Initial Claims have mostly been trending lower throughout 2018, they are 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).
At such low levels, Initial Claims will probably trend upwards in 2019. If Initial Claims starts to consistently trend upwards in 2019, then we will know that 2019 is the bull market’s top.

1 am: 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 1.705 million to 1.631 million). However, the key point is that Continued Claims are trending 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 3, 2018: outlook

Outlook

Here’s what I think will happen based on our discretionary fundamental outlook:

  1. The U.S. stock market is in a long term topping process. It’s hard to know if there will be an exact new all-time high or not. Some topping processes make slightly lower highs, some topping processes swing sideways in a range, and some topping processes make higher highs. Topping processes can last 6-12 months.
  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.