Stocks on November 29, 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. Inflation-adjusted net value added of nonfinancial corporate business is trending sideways. A late-cycle symptom.
  2. ISM manufacturing new orders index is still relatively high. Suggests that the bull market isn’t over.
  3. Housing Months of Supply is rising. Will be long term bearish for stocks in 2019 if this persists.
  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 sideways. Not long term bearish for U.S. stocks yet, but watch out in case this rises even more.
  6. Looking at how tariffs have impacted the stock market.

Read The economy is getting worse. What this means for stocks
1 am: Inflation-adjusted net value added of nonfinancial corporate business is trending sideways. A late-cycle symptom.
The inflation-adjusted net value added of nonfinancial corporate business is trending sideways. (The recent slight increase is most likely due to Trump’s tax cut. Reagan’s tax cut in the mid-1980s resulted in the same thing).


This suggests that we are in the late stages of this economic expansion and bull market.
*This is not a tool for timing the bull market’s top.
1 am: ISM manufacturing new orders index is still relatively high. This suggests that the bull market isn’t over.
The ISM manufacturing new orders index is still relatively high, at 57.4

In the past, bear markets and recessions started when the ISM manufacturing new orders index was at 50-55, or lower.
This suggests that the bull market is not over. However, if it falls a little more, then this will no longer be a long term bullish factor for the stock market in 2019.
1 am: Housing Months of Supply is rising. Will be long term bearish for stocks in 2019 if this persists.
As we’ve mentioned recently, the U.S. housing market is deteriorating. Housing is a key leading sector for the economy, and hence a key leading sector for the stock market.
Housing Months of Supply has gone up recently. It is now at 7.4. This is typically what happens towards the end of an economic expansion and bull market.
If this continues, it will be a long term bearish factor for the stock market in 2019.

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 up from its previous reading (from 224k to 234k). 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 sideways. Not long term bearish for U.S. stocks yet, but watch out in case this rises even more.
Yesterday’s reading for Continued Claims went up (from 1.660 million to 1.710 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.

1 am: Looking at how tariffs have impacted the stock market.
Ahead of the G20 meeting (where Trump and Xi will talk tariffs), here’s an interesting look at how the trade war has impacted the U.S. stock market and Chinese stock market so far. From Ed Yardeni


Read Stocks on November 26, 2018: outlook

Outlook

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

  1. The S&P 500 has less than 3 quarters left in this bull market (bull market top sometime in Q2 2019).
  2. The recent decline is just a correction in a bull market. 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.